Fitch Ratings has upgraded SOLOCAL Group's (Solocal) Long-Term Issuer Default Rating (IDR) to 'CC' on coupon deferral agreement, after having downgraded it to 'RD' (Restricted Default) from 'C' on a failure to cure its missed interest payment.
In addition, Fitch has also downgraded Solocal's senior secured debt to 'C' from 'CC' before upgrading it to 'CCC-' with a Recovery Rating of 'RR3'.
The company has obtained the required majority bondholder consent to defer its 15 June and 15 September coupons on its EUR176.7 million and EUR18.7 million floating-rate notes, which mature in 2025. Fitch views the uncured expiry of the original 30-day grace period following the missed interest payment as a 'RD' and the agreed payments deferral as a distressed debt exchange (DDE) as it is a worsening of terms for noteholders.
The IDR of 'CC' reflects ongoing discussions with creditors about Solocal's capital structure that are likely to result in a restructuring or in further concessions that would be a worsening of terms for noteholders and thus likely to be recognised as a DDE.
Key Rating Drivers
High Likelihood of Restructuring: Solocal has invited bondholders to negotiations on its capital structure under the mandat ad-hoc procedure. Discussions are likely to take place in September with the company's new strategic plan at hand. Its interest payments are deferred to 30 September, before which we expect an outcome to be announced on its envisioned new capital structure or on any new deferral agreements made with creditors. In the meantime, management remains in place and operations are continuing.
Refinancing Risk Central: Refinancing risk on their revolving credit facility (RCF) and bonds due in 2025 remains the main driver of a potential restructuring. Solocal's access to capital markets is likely disrupted given its failure to stabilise its business profile and to consistently generate free cash flow (FCF) following its 2020 restructuring. If refinancing is an option, creditors are likely to require excessive interest rates to compensate the company's high-risk profile, which would only further disrupt the company's financial and operational profiles.
FCF Key to Growth: Under our forecasts for Solocal in its current capital structure, the company could continue to generate neutral to negative FCF in the short term and have a minimum liquidity buffer before debt repayment. However, to achieve a sustainable market share position, scale and a stable financial profile, Solocal would benefit from more financial flexibility through higher FCF. This could allow the company to invest strategically for growth and to be competitive in a highly dynamic market.
Debt Repayments Pressure Liquidity: Fitch estimates minimum cash for running Solocal's operations at around EUR25 million. Debt repayments of EUR4 million and EUR38 million in 2023 and 2024, respectively, of its RCF and the BPI France loan would result in insufficient liquidity headroom for 2024. We therefore see high execution risks over the next 12 months, which confirms the likelihood of a debt restructuring.
RCF Maturity: Solocal's RCF, which expires in September 2023, is fully drawn for EUR34 million and it has the option to make a full cash reimbursement of the RCF. However, due to poorer trading and following recent coupon payment deferral, we believe it is likely that Solocal will request lenders to accept a share-based payment.
However, creditors are likely to reject this request and opt for an extension of the maturity into 2024, as allowed by the financial documentation. The payment of the RCF and its terms are likely to be negotiated as part of the mandat ad hoc.
Derivation Summary
Solocal's rating reflects a transitioning business model, in particular in its shift to a subscription-based digital platform from directories. Competition in digital advertising is fierce. Changes to management and leading shareholders, and high salesforce turnover add to execution risk.
Leverage is lower than other 'CCC' to 'C' category peers' since Solocal's recent restructuring of its financial liabilities in 2020. However, it is at the maximum sustainable level given its record of debt-to-equity conversions. Solocal's debt-to-equity swaps also keep financial risk high, particularly in light of limited refinancing alternatives.
Solocal's most direct comparable peer is Yell, part of the Hibu group, which has a similar market position in the UK and is facing similar operational and financial challenges. Comparisons can be made between Solocal and specialised directories businesses such as Speedster Bidco GMBH (Autoscout24, B/Stable) or online classifieds media groups such as Adevinta ASA (BB+/Stable) and Traviata B.V. (B/Stable).
Autoscout24 is more geographically diversified, and is better positioned in its business niche, while Adevinta has materially larger scale, with stronger profitability and cash generation, underpinned by its greater diversification and strong eBay classifieds brand.
Traviata, the owner of a minority stake in Axel Springer SE, also has a stronger business model than Solocal, due to its larger scale, greater diversification and stronger brands. These peers have higher leverage metrics, but they are protected by stronger barriers to entry and by a higher product criticality for its customers, resulting in a higher debt capacity and lower refinancing risk.
We see similar reduction in leverage and comparable declines in revenue and profitability to other post-DDE ratings in European leveraged credits such as Subcalidora 1 S.a.r.l. (Imagina, B/Stable). However, Imagina's competitive position is stronger in its covered regions, with higher barriers to entry, although its customer diversification remains weak.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Revenues to decrease 7% in 2023 and 4.8% in 2024 before stabilising in 2025
EBITDA decreasing to below EUR 75 million in 2023 and 2024 before slightly recovering in 2025
Average capex at around EUR30 million annually for 2023-2026
Average annual working-capital outflows of EUR20 million-EUR25 million for 2023-2026
Repayment of EUR4 million BPI loan due in 2023
Super senior facility prepayment of EUR34 million and EUR4 million of BPI loan repayment due in 2024
Key Recovery Assumptions
Fitch adopts a going-concern (GC) approach to assessing recoveries for Solocal. This reflects the higher probability of a surviving cash-generative business with GC enterprise value as the basis for financial stakeholder recovery than liquidation in a default. We have assumed a 10% administrative claim.
We expect Solocal to be potentially attractive to trade buyers, particularly after the completion of its redundancy plan. We estimate a Fitch-defined GC EBITDA of EUR90 million, factoring in the current capital structure, potential slow growth in the number of clients, and a lower interest burden.
Our enterprise value/EBITDA is constant at 2.0x, considering business-model pressures and below 50% recoveries for senior secured loans after its restructuring in 2020.
We factor in the outstanding super senior facility that ranks ahead of the bonds and view the BPI France state-guaranteed loan as unsecured.
Based on current metrics and assumptions, the waterfall analysis generates a ranked recovery at 66%, representing ultimate recovery prospects in the 'RR3' band for existing senior secured debt. This indicates a 'CCC-' senior secured debt rating.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to an Upgrade:
Fitch does not envisage to-date an upgrade before an overhaul of the capital structure
Factors That Could, Individually or Collectively, Lead to a Downgrade:
Failure to pay interest on the bonds due 30 September 2023
Entering into a formal bankruptcy procedure
Evidence of further worsening terms for noteholders resulting in a DDE
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Minimal Liquidity: We forecast Solocal's liquidity to be under pressure in 2024 given an estimated EUR25 million cash buffer following the repayment of its EUR34 million RCF due in September 2023, which we expect to be extended to 2024. Liquidity may come under additional pressure from deteriorating business conditions or restructuring payments.
Issuer Profile
Solocal (formerly PagesJaunes, rebranded in 2013) is a French advertising company that provides digital content, websites and media campaign services to customers and businesses on a local basis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
SOLOCAL GROUP 
