Research: Rating Action: Moody’s affirms B1 ratings of THG Operations Holdings Limited; changes outlook to stable

London, May 05, 2022 — Moody’s Investors Service (“Moody’s”) has today affirmed the B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) of THG Operations Holdings Limited (THGO or the company) and the B1 rating of the company’s guaranteed senior secured bank credit facilities comprising a €600 million Term Loan B and £170 million Revolving Credit Facility (RCF). Concurrently the rating agency changed the outlook to stable from positive.

“In light of the revised profit guidance for 2022 published last month by the company’s parent THG PLC we believe that the triggers for a rating upgrade to Ba3 are unlikely to be met within the next year or more. As such, we feel it is now time to revise the rating outlook to stable from positive” said David Beadle, a Moody’s VP-Senior Credit Officer and lead analyst for THGO. “More positively, the B1 rating continues to take account of the company’s excellent liquidity and strong revenue momentum”, he added.

RATINGS RATIONALE

When publishing its 2021 results THG said that continuing headwinds across all cost lines and notably in respect of whey commodity prices would likely lead to company-adjusted EBITDA in 2022 being broadly in line with 2021. Moody’s base case had previously been for the company to grow its reported EBITDA materially year-on-year and for a gradual normalisation of delivery costs to fuel an uplift in Moody’s-adjusted EBITDA ahead of the more than 20% growth it expected in revenues. While the rating agency still expects lower exceptional costs in 2022, the company’s revised guidance means that deleveraging will not be as material or rapid as Moody’s previously expected.

In its revised base case the rating agency anticipates that THGO’s Moody’s-adjusted leverage, measured as gross debt to Moody’s-adjusted EBITDA, will still be in the region of 7x by the end of 2022. This is high for the B1 rating category, and other credit metrics including interest coverage are also relatively weak.

However, notwithstanding Moody’s expectations that THGO will continue to generate negative free cash flow, the company’s credit quality is supported by its excellent liquidity and the rating agency’s belief that the company can ultimately return to pre-pandemic company-adjusted EBITDA margins while sustaining strong top line growth. This would enable the company to deleverage and generate positive free cash flow.

STRUCTURAL CONSIDERATIONS

THGO is the company at the top of the operational sub-group that was established in 2019 (i.e. pre-IPO) and is the borrower in respect of the B1 rated €600 million equivalent Term Loan B and £170 million RCF put in place that year. These pari-passu senior secured facilities have medium dated maturities (December 2024 and 2026 for the RCF and Term Loan B respectively) and benefit from guarantees from material subsidiaries and THGO’s immediate parent, THG Intermediate Opco Limited.

LIQUIDITY

Moody’s considers that THGO continues to have excellent liquidity. Although THG had negative free cash flow of around £200 million in 2021, broadly in line with the outflow in 2020, the finished 2021 with £537 million of cash on its consolidated Balance Sheet. Significant spending on acquisitions, totalling £768 million, was covered by fresh equity funding.

The cash balances are very sizeable in the context of around £500 million funded debt. While the extent to which cash is held by companies outside the THGO borrowing group is not disclosed, Moody’s working assumption is that any such funds would be available to support THGO and operating companies if necessary. On this basis, there is a significant cushion for working capital management despite Moody’s expectation that free cash flow is likely to remain negative in 2022 and indeed 2023. The rating agency expects the company to maintain at least good liquidity over the next 12-18 months, and to have no need to draw its RCF during this time. The rating agency does not expect the company to make any material acquisitions within this time frame unless it was able to raise equity to fund them.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

THG’s online focus means that its revenue continues to benefit from the systemic shift of consumer spending away from physical retail stores. While Moody’s expects overall online retail sales growth to ease back from the highs of the pandemic, the rating agency expects that companies like THG which are growing from a relatively modest base and benefit from wide geographic diversification to sustain strong year-on-year growth in 2022 and beyond.

At the time of the IPO THG’s governance structure was unusual for a publicly listed company in several ways, including the dual role of Matthew Moulding as Executive Chairman and CEO, his right to veto hostile takeovers for three years post IPO, and his position as the company’s landlord as well its largest shareholder.

Since then the company has appointed an independent non-executive Chairman and Mr Moulding has agreed to relinquish the veto rights when the company steps up from a Standard Stock Market listing to a Premium one in 2022. The resultant eligibility for FTSE index inclusion should be positive for future access to equity capital.

Moody’s recognises that even before the IPO the executive team had been subject to the scrutiny of non-executive directors and several institutional shareholders, which continues to be the case since the listing. However, the potential for negative surprises in respect of governance is in Moody’s view higher when there is concentrated ownership, particularly in the hands of executive management.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody’s view that while over the next 12 months cost headwinds will constrain meaningful profit growth and deleveraging the company will maintain at least good liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody’s would consider upgrading the ratings if the company’s Moody’s-adjusted EBITDA margin recovers to the historic level of around 9% while it maintains strong organic revenue growth. Quantitatively this would equate to an ability to sustain Moody’s-adjusted gross leverage well below 4.5x. Moreover, an upgrade would likely require the company to generate positive free cash flows, maintain excellent liquidity, and demonstrate conservative financial policies. This would likely include funding bolt on acquisitions, complementary to existing core businesses, with the company’s significant cash balances, and raising fresh equity rather than debt in the event of material acquisitions.

Conversely, Moody’s could downgrade the ratings if the company fails to generate growth in profitability such that the ratings agency considers the company’s Moody’s-adjusted gross leverage will not be on a trajectory to reduce to sustainably below 5.5x within the next 18 months. A negative rating action could be appropriate before then if the company’s excellent liquidity were to deteriorate due to a sizeable depletion of the company’s cash balances, or if contrary to Moody’s current expectations the company raised additional debt to fund acquisitions.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296095. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

THG PLC is headquartered in Manchester, England and has a diverse range of e-commerce focused activities, and certain associated manufacturing facilities. Its largest brands lookfantastic.com and myprotein.com operate in the beauty and wellness retail segments respectively.

The company listed on the London Stock Exchange in September 2020 and has a current market capitalisation of around £1.4 billion. In 2021 the company reported revenues of £2.2 billion and adjusted EBITDA of £161 million. 41% of revenue was generated in the UK, 21% elsewhere in Europe, 19% in the US, and 19% in the rest of the world.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Beadle
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody’s Investors Service Ltd.
One Canada Square
Canary Wharf
London, E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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