Standard & Poor's and Moody's have downgraded Spanish supermarket chain DIA's credit ratings to below investment grade, after the retailer issued its third profit warning in 12 months last week.
According to analysts, mounting pressure on DIA may force it towards a capital increase.
"The leverage will rise significantly to ~ 2.9x (assuming the expected average EBITDA'18 range, 350/400 M euros.) In addition, this puts at risk the refinancing needs of 2019 maturities (422 M euros, 35 pct DFN), which makes the possibility of a capital increase more and more probable", said Sabadell analysts after Moody's downgrade.
Moody's cut to "Ba2 from "Baa3", and S&P's move to "BB-" from "BBB-", is the latest blow to the retailer which has lost more than two-thirds of its market value since a 2015 peak.
S&P said the result of its review of DIA's rating can end either with an affirmation of the 'BB-' issuer credit rating or a cut by up to two notches.
Earnings Likely To Drop
"Our decision to downgrade DIA's ratings and to place them under review reflects Moody's view that earnings will fall meaningfully in 2018 and 2019, on the back of market share losses in Spain and currency depreciation in emerging markets," Moody's analyst Vincent Gusdorf said.
The magnitude of the earnings revision highlights weaknesses in DIA's business model and governance, which will likely make it difficult to recover its competitive position and improve its operating performance going forward, Gusdorf said.
Market Competition
After making gains from cash-strapped customers during Spain's economic crisis, DIA is now struggling against tough competition from local rival Mercadona and German discounters Lidl and Aldi.
LetterOne, an investment vehicle owned by Russian tycoon Mikhail Fridman, prompted speculation of a possible takeover when it disclosed a 29% stake in DIA last month. This is just below a 30% threshold where an investor must make a full buyout offer under Spanish law.
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