By Eleanor Duncan

 

LONDON, Dec 11 (IFR) – Casino bonds have rallied despite a twist in parent company Rallye’s draft rescue plan which could rely on large dividend payments from the French retailer in four years’ time.

 

Rallye’s new draft safeguard plans, announced on Monday, include a potentially early repayment of a large amount of debt – up to €1.1bn – in 2023. That could mean Casino – which Rallye is already dependent on to maintain its debt pile – is on the hook for a large dividend payment.

Those plans will see Rallye – along with several other Casino parent companies – Fonciere Euris, Finatis and Euris – repay their liabilities over a 10-year period.

In May Casino chairman and chief executive Jean-Charles Naouri placed parent companies Rallye, Finatis and Fonciere Euris under safeguard protection from creditors in a bid to save the group from collapse.

The companies will pay a marginal sum of €100,000 over the first two years, then 5% of the debt principal between the third and ninth years, and then a final 65% in the final year.

However, the plans come with a new tweak from those originally finalised in September. Rallye creditors secured by Casino share pledges will be repaid in full earlier than the other debt, pointed out Spread Research analysts.

That means a potentially early repayment of a large amount of debt – up to €1.1bn – in 2023.

And those creditors which vote in favour of the draft safeguard plans will also be repaid early.

« Rallye’s proposed draft safeguard plan is more negative than we initially expected, due to the proposed early repayment of a large amount of debt, » wrote Spread Research analysts.

« At first glance, this is obviously negative for Casino’s bonds, because it implies very large dividends (to the tune of up to €2bn) from Casino to cover Rallye’s debt repayments in 2023, given that there are only small other assets left to be sold to help repay debt. »

 

However, by Wednesday, yields on Casino’s 5.875% January 2024s, issued as part of a €3.8bn refinancing package in November, had dropped to 4.515%, down from 4.602% on Friday – before the plan had been announced – according to Refinitiv data.

« In many ways, the penny has already dropped, » said one investor of the Casino bond performance in secondary.

« Investors know there is too much debt in the structure. Also, 2023 is many years away from now. »

The investor described the Rallye-Casino problem as « circular ».

« Rallye needs value from Casino to repay its debt. But you also need to delever Casino in order to drive up the value to Rallye creditors, » he said.

In addition, bondholders may know that Casino’s shareholder distribution is now restricted by its covenants on the recently issued 2024 bonds and bank debt, wrote Spread Research analysts.

Dividends are limited as long as Casino’s gross debt/Ebitda ratio is above 3.5x post-dividend payment. On 30 June 2019, this ratio was 6.4x, said Spread Research analysts.

« In our view, the deleveraging case for Casino is unchanged, because whether or not Casino ends up materially supporting Rallye, it first needs to deleverage from its current high level, » wrote analysts.

Finally, Casino does not have the financial means to pay so much, wrote analysts. The group is selling assets to deleverage and meet its own debt reduction target. It is also constrained by maintenance covenants on its revolving credit facility.

Rallye is hoping to get approval for the safeguard plans from the Paris Commercial Court by the end of the first quarter of 2020 at the latest.

Casino’s net debt stood at €2.71bn at the end of 2018, and Rallye’s stood at €2.9bn.

 

(Reporting by Eleanor Duncan, editing by Alex Chambers and Sudip Roy)

(( Eleanor.Duncan@thomsonreuters.com ; +44 20 7542 5016; ))

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