EG downgraded by Moody’s amid governance concerns

Moody’s Investors Service said on Wednesday it downgraded the corporate family rating (CFR) of Blackburn-based petrol station and convenience store giant EG Group to B3 from B2 and its probability of default rating (PDR) to B3-PD from B2-PD.

EG Group’s billionaire owners, the Issa brothers, recently agreed to buy Leeds-based Asda from Walmart Inc. along with private equity group TDR Capital LLP in a £6.7 billion deal.

Privately-held EG Group was founded with a single petrol station in Bury as Euro Garages by the Issa brothers and has grown fast around the world through a series of debt-fueled deals.

EG now owns almost 6,000 petrol stations and reported over €20 billion of revenue last year — but some analysts have expressed concerns that the company’s internal controls have not improved in line with its fast growth. 

Moody’s has also downgraded to B3 from B2 and to Caa2 from Caa1 the ratings on EG’s first and second lien instrument ratings respectively of the debt issued by its subsidiaries EG Finco Limited, EG Global Finance plc., EG America LLC and EG Group Australia Pty Ltd.

The outlook on the ratings has been changed to stable from negative.

“The rating action reflects Moody’s view of the company’s limited progress in terms of financial reporting and governance, with regards to internal controls and board composition, relative to its substantially increased scale and complexity following large-scale M&A activity in the last two years,” said Moody’s.

“Moody’s understands that this has contributed to the recent resignation of its auditors and their replacement with new auditors.

“Moody’s also acknowledges that the group’s 2019 accounts received an unqualified opinion by Deloitte and understands that the appointment of KPMG as new auditor followed an extensive on boarding process, that there have been no accounting or auditing disputes between EG and Deloitte, and that Deloitte continues to audit the group’s Australian operations.

“The rating action also reflects the company’s still meaningful gap between pro-forma debt metrics and debt metrics based on audited financial figures, albeit reducing and expected to be at the lowest level ever in Q3 2020.

“More positively, Moody’s anticipates an improvement in the company’s pro-forma debt metrics in 2020, with leverage expected to have reduced to around 6.7x in Q3 2020, the lowest level achieved by the company since its inception following strong reported results, the realization of synergies from previous acquisitions and no significant M&A activity in the last 12 months.”

Moody’s said it currently considers EG’s liquidity position as adequate, with cash on balance sheet and available revolving credit facilities expected to be around $1.4 billion at 30 September 2020 including the positive effect on liquidity of deferred excise taxes of $600 million, “which will reverse at some point during the next several quarters.”

Moody’s added: “The ratings could be upgraded if the company improves its governance with regards to internal controls and board composition as expected for a company of the scale and complexity, and at the same time its key debt metrics also improve, as evidenced by Moody’s adjusted gross debt to EBITDA (leverage) sustained below 6.5x, with no meaningful gap between reported and pro-forma leverage.

“Additionally, adequate liquidity needs to be maintained at all times.

“The ratings could be downgraded if no improvements in governance and internal controls materialise, or the gap between audited reported and pro-forma leverage does not reduce from current levels.

“A downgrade could also result if leverage increased sustainably above 7.5x, in case of further significant debt-funded acquisitions, or if liquidity deteriorates.”