Moody’s has downgraded EG Group, the highly leveraged petrol stations company whose owners are buying Asda, citing concerns over the way it reports its €8bn debt burden as well as the governance issues that this month prompted the company’s auditor to resign.
The rating agency said its decision to lower EG’s credit rating, which pushes the company’s debt deeper into junk territory, was based on its “limited progress in terms of financial reporting and governance” as it has expanded rapidly. Moody’s also cited a gap between its own calculations of the company’s leverage ratio based on audited numbers and those based on EG’s management accounts.
The downgrade from B2 to B3 is the latest setback for the Blackburn-based business just as its owners navigate the UK’s largest leveraged buyout in more than a decade. This month Deloitte quit as EG’s auditor because of concerns over its governance and internal controls, including the absence of any external board members.
“The downgrade primarily confirms that governance controls have not kept up with the pace of growth,” said George Curtis, a credit analyst at TwentyFour Asset Management, adding that the fund manager sold its EG bonds in January, “given the aggressiveness of the largely debt-funded growth the business had been pursuing”.
EG Group, which is owned by brothers Mohsin and Zuber Issa and the private equity firm TDR Capital, has expanded rapidly in recent years through debt-funded acquisitions and reported €20bn of revenue in its most recent accounts. It owns nearly 6,000 petrol stations in Europe, the US and Australia.
While EG is not a party to the £6.8bn Asda buyout, its rapid growth has propelled the brothers and their backers into a position to strike the deal.
“We strongly disagree with Moody’s decision,” EG Group said, adding that the downgrade “doesn’t reflect the continued, wide-ranging investment in strengthening the business and the significant progress made over the past 12 months”. The group will update investors next month, the spokesman added.
Moody’s said it acknowledged that there were no auditing or accounting disputes between EG and Deloitte and that KPMG had now been appointed as its auditor. Last week the rating agency S&P Global said its rating on the company was unchanged.
While Moody’s estimates EG’s debt to be 11.4 times its earnings before interest, tax, depreciation and amortisation based on audited figures, the figure based on the company’s management accounts is 7.5 times, the agency said. While for many companies there is a difference between the two sets of figures, it is unusual for a rating agency to flag the gap.
Two of the group’s bondholders said that lingering governance and reporting concerns were likely to push up the cost of borrowing for the brothers and their private-equity backers who are seeking to raise £4bn through high-yield bonds and leveraged loans to fund the Asda acquisition.
EG’s downgrade leaves the group's debt one notch above the triple-C band. Any further downgrade would make it harder for the company to raise fresh funds from collateralised-loan obligations, structured investment vehicles that are big lenders to the group, because CLOs have strict rules that make it harder to hold loans that carry ratings in this deeply junk category.
One bondholder said that the group’s leverage ratio was too high to justify its previous B2 rating, adding: “This really was just the excuse needed for a downgrade.”
“Between high rates of interest and the rating agency, the world is saying [they need to] improve their credit profile,” the investor added.
The group’s €700m bond that is set to mature in 2025 was trading at a yield of 7.4 per cent on Wednesday.
Moody’s said it expected the group’s leverage ratio to be reduced to 6.7 times in the third quarter of this year and that EG could be further downgraded if leverage increased above 7.5 times following any further debt-funded acquisitions.
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