Scope Ratings downgrades Karlie’s corporate rating to B from B+

Scope Ratings downgrades Germany-based Karlie Group GmbH (‘Karlie’) to B from B+. The rating action is mainly driven by the weak operating development – albeit recovering – and the persistent dependence on external financing. The Outlook remains Stable.

KEY RATING DRIVERS

Strong position in the niche market of pet products; satisfactory diversification across markets, products and customers. With a turnover of about EUR 100m, Karlie defends its strong position as a top-three wholesaler in the stable and inelastic European market for pet accessories and snacks. Scope assesses positively Karlie’s geographic diversification across different and highly fragmented European markets, as well as the width and depth of its product assortment, particularly compared to its direct peers. In its two core markets of Germany and Belgium, the group has market shares of 3% and 20%, respectively; and with a sales share of roughly 50% outside these two markets, Karlie is much better diversified than its main competitors, TRIXIE Heimtierbedarf GmbH & Co. KG and Zolux SAS.

Group benefits from low industry risks. Karlie’s rating is supported by Scope’s assessment of generally low risks in the distribution of pet products. Given the low exposure to cyclicality, and Scope’s view of medium entry barriers and medium substitution risks, Karlie’s cash flows may generally benefit from robust market conditions, provided it is not held back by operating distortions currently in place.

Weak financial risk profile due to high leverage and low fixed-charge coverage. Karlie’s rating continues to be constrained by a weak financial risk profile. Negative operating results persist into 2015 (expected EBITDA of minus EUR 1.6m; minus EUR 9m in 2014), and the group is still burdened by integration and restructuring costs, causing it to lag behind both Scope’s expectations and its own. Therefore, operating results are still insufficient to fully cover fixed charges (EBITDAR/fixed-charge cover of 0.5x in 2015E; -0.1x in 2014). On the other hand, Scope notes that operating and financial restructuring measures have finally kicked in, with fixed-charge cover expected to recover (EBITDAR/fixed-charge coverage for 2016 of 1.0x) and leverage expected to improve (adjusted debt/EBITDAR for 2016 of 7.9x). The positive trend in leverage should continue into 2017, with adjusted debt/EBITDAR reducing to 5.3x.

Constrained liquidity and persistent dependence on external financing. With the expected prolongation of its credit and factoring lines with two major bank consortia , Karlie will likely gain significantly more room to manoeuvre to focus on the operational turnaround. Although the group can access roughly EUR 5m of undrawn debt facilities, liquidity remains tight, as operating cash flows are not expected to redeem bank loans in the short term. Moreover, a continuous prolongation of credit lines will likely depend on Karlie’s plans to refinance its senior unsecured corporate bond in June 2018. Therefore, in Scope’s view, the liquidity and refinancing needs of Karlie largely constrain the rating to B.

No rating impact from parent support. Karlie’s 100% shareholder, Perusa Partners GmbH, appears to be both willing and committed to provide financial support when the group’s cash flows are weak. However, Scope does not have enough insight regarding the shareholder’s financial ability to provide ongoing support if Karlie’s operations continue to perform poorly.

Rating outlook is Stable. A rating upgrade would be warranted if Karlie’s fixed-charge coverage ratios significantly improve to more than 1.5x on a sustainable basis. A negative rating action would be needed if severe refinancing risks arise for its credit lines or for the corporate bond in June 2018.

REGULATORY AND LEGAL DISCLOSURES

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Executive Board: Torsten Hinrichs (CEO), Dr. Stefan Bund.

The rating analysis has been prepared by Sebastian Zank, Lead Analyst
Responsible for approving the rating: Olaf Tölke, Committee Chair

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest

The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating
- Prospectus
- Website of the rated entity
- Annual financial statements
- Valuation reports, other opinions
- Annual reports/semi-annual reports of the rated entity
- Current performance record
- Detailed information provided on request
- Data provided by external data providers
- Interview with the rated entity
- External market reports
- Press reports / other public information

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodology applicable for this rating (Corporate Rating Methodology) is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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