EthiFinance Ratings reaffirms BBB+ its long-term corporate rating and instrument rating at BBB+ for Bellon S.A. and the company’s €200m NEU MTN instrument. EthiFinance Ratings also reaffirms its SR1 short-term rating on the €500m NEU CP instrument of Bellon S.A.
Bellon is a family-owned holding company the only asset of which is a 42.8% stake in Sodexo’s issued share capital, with 57.3% of its voting rights as of 31 December 2021. Bellon is 72.6%-owned by the children of Pierre Bellon (Sodexo’s founder who died in January 2022); other members of the family hold 7.8% and the Sodexo-owned holding company Sofinsod owns the remaining 19.6%. Considering that Bellon owns only one asset, we supplement our holding company ratings approach by using proportionate consolidation for computing several of Sodexo’s key credit metrics.
On the one hand, our rating is buoyed by the large size of the underlying company Sodexo, which generates significant revenues (around €20bn on a consolidated basis per annum over the last few years) and holds leading positions in its markets around the world. We also value the conservative financial policy of the Bellon family, which distributes historically less than 10% of the dividends received from Sodexo, resulting in a very low LTV ratio of 4.5% as of July 12th, 2022.
On the other hand, the rating is constrained by the fact that the holding is not diversified in terms of value and industry. Also, Bellon’s rating is still impacted by the leverage ratios of Sodexo (calculated in proportion to the capital held) - which are improving after two difficult years due to the Covid-19 pandemic impact on profitability (i.e., net debt-to-EBITDA and FFO-to-debt) but which remain rather high given the rating category of Bellon.
Founded in 1966, Sodexo is a France-based provider of food services and facility management services to various end-markets (Education, Corporate Services, Healthcare, Sports & Leisure). The group is one of the leading global companies in its sector and is relatively well-diversified in terms of geographic mix, with an operating presence across 55 countries as of the end of February 2022 (down from 64 due to divestments of some non-core activities).
Through 2021 and into 2022 the group’s performance has recovered well from the impacts of the Covid-19 pandemic. Indeed, Sodexo’s revenues for the twelve months to end-May 2022 were, at €20.1bn, up by 20% yoy (versus €16.8bn over the previous 12-month period). Each business unit has grown over the period from April 2021 to May 2022. Revenue growth in yoy terms in the period was strongest for the two divisions which were particularly impacted by the Covid-19 pandemic, namely Business & Administration and Education. This is mainly due to the progressive reopening of corporate and university collective catering following the easing of measures taken to limit the spread of the virus. Sodexo’s global activities have still not returned to their pre-crisis, we forecast €20.4bn in terms of revenue in FY22 versus €22.0bn in FY19. However, assuming that the health situation improves further in the months ahead, and that the Russia-Ukraine conflict and higher inflation do not derail global economic activity, we expect continued revenue growth for Sodexo, especially in North America, which is slightly behind Europe in terms of recovery of its business post-pandemic due to longer restrictions than in Europe.
The lowering of Bellon’s reported net debt (from €300m at end-2020 to €204m at end-2021) is linked to the dividend received in December 2021 (€126m), which enabled Bellon to proceed to the partial repayment of the existing ELS for €100m. Following this repayment, at end-2021 the remainder drawn under the ELS was €50m.
Going forward, excluding a major event (debt-funded acquisitions or adverse macroeconomic developments), we estimate that Sodexo will be able to decrease further its net adjusted leverage ratio with improving profitability as operations normalize, to reach the high-end of its pre-Covid range by August 2024.
As of end-December 2021, Bellon’s gross debt stood at €227m, mainly made up of i) NEU CP instruments for €127m, ii) equity-linked swap (ELS) debt maturing in April 2023 from CACIB of €200m, of which only €50m was drawn as of December 2021, and iii) the NEU MTN program for €50m. With a cash position of €24m, net reported debt stood at €206m at the end of 2021. As a result, the loan-to-value ratio (net financial debt/asset value) is assessed at 4.5% as of July 4th, 2022.
Please note there are some covenants attached to the ELS, including the LTV ratio to be below 50% (from a legal perspective in the debt covenants, to comply with this condition Bellon has to maintain a ratio above 2.0x of the shares’ market value to loan value). However, we expect them to be met with a significant headroom based on our forecast.
Earlier in 2022, Bellon completed the extension of its undrawn €100m revolving credit facility by one year (to July 2023), which is intended to be used as a liquidity line alongside the NEU-CP program.
Adequate liquidity profile
Bellon’s liquidity score is 3, which is the highest score according to our methodology. Bellon’s score is high despite approaching maturities (ELS matures in April 2023) due to its solid financial profile. Indeed, we expect no issues for Bellon to refinance its existing debts if needed. In addition to that, Bellon owns liquid and valuable assets, i.e., Sodexo shares, the monetization of a small portion of which could largely suffice to finance any eventual cash needed by Bellon without it losing control over Sodexo.
Please note that we do not take into account in our liquidity analysis the undrawn portion (€150m) of the NEU MTN program because it is not committed.
Credit Metrics Expected Evolution (CMEE)
We assess the CMEE to be Positive which reflects the expected recovery of Sodexo’s operating cash-flow and its ability to lower its leverage ratio. Also, we expect the continuation of the decrease of the loan to value of Bellon under the assumption of a stable share price of Sodexo.
- Long-term corporate rating: BBB+
- NEU MTN rating: BBB+
Bellon is positioned in the high-end of the BBB+ category. A long-term rating upgrade of Bellon to A- would require a reduction in the EthiFinance Ratings’ net adjusted leverage ratio, which would most likely be driven by a major improvement at the Sodexo level. We would also view positively a significant diversification of Bellon’s investment portfolio, an option which is excluded, at least in the short term, based on our talks with the company.
Although rather unlikely at present, a downgrade to BBB could be triggered if Sodexo’s credit profile deteriorates significantly, which would have an important impact on Bellon’s proportionate credit metrics.
- Short-term corporate rating: SR1
Bellon is positioned in the middle of the range for our SR1 rating. An upgrade to SR0 would mainly require a significant diversification of Bellon’s investment portfolio, an option which is currently excluded based on our talks with the company.
A downgrade to SR2 is unlikely. One could be triggered if Sodexo’s credit profile deteriorates significantly, which would have an important impact on the LTV of Bellon S.A.
SPRR/2022/758 & 759 &757/12/07/2022
Initiation report: No.
Rating initiation: Long-term corporate and instrument rating (NEU MTN) to BBB+ on August 30, 2021. Short-term corporate and instrument rating (NEU CP) to SR1 on June 5, 2018.
Last rating action: We initiated the public long-term rating of the NEU MTN program at BBB+ and we reaffirmed the public short-term rating of the NEU CP of Bellon at SR1 on August 30, 2021.
Solicited, short-term public rating on NEU CP instrument, long-term public corporate rating and NEU MTN instrument public rating.
With rated entity or related third-party participation: Yes, this report was published after being reviewed by the issuer.
Ancillary services provided to the rated entity: No ancillary services are provided to Bellon. However, EthiFinance Ratings provides ancillary services to subsidiaries within the Sodexo group, which is mainly owned by Bellon. EthiFinance Ratings also provides solicited public ratings to Sodexo. (Updated on July 7th, 2022).
With access to internal documents: Yes
With access to management: Yes
Name of the rating committee chair: Johann Scavone, Senior Credit Analyst.
Material sources used to support the rating decision:
- Financial statements 2021, 2020, 2019, 2018, 2017, 2016
- Discussions with Bellon management
Limitation of the Rating action:
EthiFinance Ratings believes the quality and quantity of information available on the rated entity is sufficient to provide a rating.
EthiFinance Ratings has no obligation to audit or verify the accuracy of data provided.
Principal methodology used in this research available at:
20 boulevard Eugène Deruelle