Fitch Ratings has downgraded SOLOCAL Group's (Solocal) Long-Term Issuer Default Rating (IDR) to 'C' from 'CC'.
Fitch has also downgraded Solocal's senior secured debt to 'CC' from 'CCC-'. The Recovery Rating on the senior secured debt is 'RR3'.
The downgrade reflects Solocal's missed payment of interest that was due on 15 June. The company has entered a 30-day grace period to cure the payment as provisioned in the debt documentation. This follows the company's announcement on 7 June of its intention to defer its coupon payments in June and in September 2023 on its EUR176.7 million and EUR18.7 million floating-rate notes, which mature in 2025. We expect Solocal to negotiate with bondholders for a waiver or a standstill agreement on payments due for the rest of 2023.
Fitch expects to downgrade the IDR to 'RD' (Restricted Default) if the interest payment deferral is not cured on expiry of the original grace period, in accordance with our rating definitions.
Key Rating Drivers
Coupon Payment Deferral: We understand from management that the decision to suspend quarterly coupon payments is to preserve liquidity and ongoing operations ahead of debt maturity payments in 2024 and 2025. We expect management to hold talks with bondholders to achieve a mutually agreed interest waiver under the 'mandat ad-hoc' procedure opened at the Court of Nanterre.
Imminent Default If Solocal agrees with bondholders on the deferral of interest payments this would represent a worsening of terms for noteholders and would likely be recognised as a distressed debt exchange (DDE) under our criteria. Failure to cure the interest payment within the 30-day grace period - which would be an event of default - or the completion of a DDE would likely result in a further downgrade to 'RD'.
Solocal's preparation for negotiations with creditors means debt restructuring is very likely as it seeks a new strategic plan ahead of their bond maturity in 2025.
RCF Maturity Extension Likely: Solocal's revolving credit facility (RCF) expires in September 2023 and it is fully drawn for EUR34 million following its EUR10 million repayment in 2022. Solocal has the option to make a full cash reimbursement of the RCF. However, due to poorer trading and following recent coupon payment deferral requests to preserve liquidity, we believe it is likely that Solocal will request lenders to accept a share-based payment.
However, creditors might reject this request and opt for an extension of the maturity into 2024, as allowed by the financial documentation. This would however entail an amortisation payment of EUR5 million- EUR10 million in cash or shares in 2023. However, we believe the payment of the RCF and its terms are likely to be negotiated as part of the mandat ad hoc.
Debt Reimbursements Pressure Liquidity: Fitch estimates minimum cash for running Solocal's operations at around EUR25 million. Debt repayments of EUR14 million and EUR28 million in 2023 and 2024, respectively, of its RCF and the BPI France loan would result in minimal liquidity headroom. We therefore see high execution risks over the next 12 to 18 months, which makes a debt restructuring very likely to avert insolvency.
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. 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 larger scale and 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
Number of customers slowly declining to around 265,000 by 2024 before stabilising in 2025
Fitch-calculated average revenue per account decreasing slightly to around EUR1,335 for 2024 and stable in the following two years
EBITDA margin at 23% in 2023 and slightly recovering to around 24% by 2025
Average capex at around EUR30 million annually for 2023-2026
Average working-capital outflows of EUR30 million-EUR35 million for 2023-2026
Super senior facility prepayment of EUR10 million and EUR4 million of BPI loan repayment due in 2023
Super senior facility prepayment of EUR24 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 'CC' senior secured debt rating.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Upgrade:
Fitch does not envisage, to-date, an upgrade before an overhaul of the capital structure, based on the company's public disclosure of its intention to defer June and September interest payments
Factors That Could, Individually or Collectively, Lead to Downgrade:
Lack of payment of interest on the bonds by 15 July 2023 when the original cure period will elapse
Entering into a formal bankruptcy procedure
Evidence of 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 and following repayment of its EUR34 million of the RCF due in September 2023, which we expect to be extended in part to 2024. Liquidity may be put 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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
SOLOCAL GROUP 
