Sodexo S.A. Outlook Revised To Negative Amid COVID-19 Effects; 'A-' Rating Affirmed

  • Sodexo S.A.'s (Sodexo's) global operations are expected to see significant disruption in second-half fiscal 2020 due to the COVID-19 pandemic, leading management to revise their fiscal 2020 (year ending Aug. 31, 2020) guidance, with a €2 billion revenue decline and a consequent 30% drop in operating profit expected.
  • The group maintains a prudent financial policy, with cash expected to increase in fiscal 2020 given no large acquisitions or share buybacks were anticipated in the period (prior to COVID-19), and we believe management will remain conservative with regards to capital expenditure (capex) and dividends in the current environment.
  • We are affirming our 'A-/A-1' long- and short-term issuer credit ratings on the company and our 'A-' issue ratings on its unsecured debt.
  • The negative outlook reflects our view that the effects of the COVID-19 pandemic will result in funds from operations (FFO) to debt falling below our 30% threshold, however, we expect this will be temporary.
DUBLIN (S&P Global Ratings) March 25, 2020-- S&P Global Ratings today took the rating actions listed above.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now" and "COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure," published March 17 on RatingsDirect). As the situation evolves, we will update our assumptions and estimates accordingly.
The COVID-19 pandemic is expected to affect operations during second-half fiscal 2020.   Disruption to date has been predominately across Sodexo's on-site services business, with both forced closures and voluntary closures across divisions including education and business and administrative services as remote working measures are imposed by the majority of corporations. Further effects are expected as governments impose more stringent measures to ensure social distancing, resulting in the closure of many public places. We forecast a revenue decline of about 7% over 2019, with a 130 basis point (bps) effect on S&P Global Ratings-adjusted EBITDA margin as a result for fiscal 2020.
Our negative outlook reflects the tightening rating headroom due to current macroeconomic events.  The company was affected by a number of macroeconomic events already this year including the Australian wild fires and French worker strikes. The worldwide effect of the COVID-19 pandemic will continue to tighten rating headroom, but we anticipate a rebound in volume and margins for fiscal 2021 as the virus is contained. Although we do not expect the company to see a return to solid organic growth of 3% seen in 2019, we do forecast additional benefits from postponed sporting events, which will support organic revenue growth in fiscal 2021. This, coupled with a rebound in margin, will likely see FFO to debt return above 30%. However, we continue to closely monitor the effects of COVID-19.
We expect Sodexo's credit metrics to be temporarily affected but its exceptional liquidity will allow it to weather the impact of COVID-19.  Free operating cash flow (FOCF) is expected to fall to about €400 million in light of our revised forecast, but we expect that management will be able to limit capex, minimize acquisition spending, and halt share buybacks this year, in line with financial policy, to minimize the effects. However, we expect S&P Global Ratings-adjusted funds from operations (FFO) to debt to fall below our 30% threshold, with an increase in adjusted debt to EBITDA of about 3x.
The negative outlook reflects over view that FFO to debt has fallen below the 30% threshold in current trading conditions. We expect these conditions to be temporary, but note the potential for a lower rating over the next 12 months amid prolonged effects from the COVID-19 pandemic.
We could consider lowering the rating if S&P Global Ratings-adjusted FFO to debt was sustained below 30% and the group saw a prolonged weakening of operating performance. This could be, for instance, if EBITDA margins were to fall below 5%.

We could revise the outlook to stable if the company maintained or returned FFO to debt above 30%, due to lesser operational effects following a quick containment of COVID-19, with S&P Global Ratings-adjusted debt to EBITDA falling back below 2.5x
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