Rallye is grappling with a tricky combination of debt and a difficult retail business. It owns a 51.1 percent stake in Casino and relies on its dividends to service borrowings. The need to funnel cash to its parent makes it hard for Casino to reduce gearing from a toppy three times EBITDA. That, along with tough competition in France has caused its share price to almost halve this year. The decline leaves Rallye with borrowings of 2.9 billion euros and assets, which consist mostly of the Casino stake, worth 1.7 billion euros.
Bond markets are jittery. Rallye’s five-year credit default swaps, a form of insurance against default, have soared to over 2,800 basis points, from just over 700 in March. That implies a more than 80 percent probability of failure, according to Eikon. Rallye’s 3.4 percent bond maturing in 2022 yields 26 percent. Some 975 million euros of bonds come due between now and March.
That’s not all. Rallye also issues commercial paper, a form of short-term borrowing typically used by highly rated companies and banks. It placed 1.3 billion euros of the notes this year, but issuance in August was just 65 million euros compared with a monthly average of around 200 million euros since the start of 2017, according to Breakingviews estimates. Rallye has 311 million euros of commercial paper outstanding which must be repaid over the next 100 days.
Naouri, a former senior civil servant and banker, has a backup. Banks have committed 1.7 billion euros of credit facilities. But there’s a catch. Most of this debt is secured – for every euro that Rallye borrows, it must put up 1.3 euros’ worth of Casino shares. Based on the supermarket’s current share price, Rallye would have to pledge its entire holding in Casino to meet bond maturities between now and March, according to Breakingviews estimates.
It might not come to that. Casino plans to sell 1.5 billion euros of assets to pay down debt. And its share price may recover, easing pressure on Rallye. But the risk is that Rallye pledges its Casino shares to banks, and then fails. That would be a blessing for holders of shorter-dated debt who get repaid, and a bad day for those left at the table.