Dollar high, crisis and devaluation complicate Codere's business

Argentina remains a headache for Spanish companies operating or investing in the country. The current crisis, added to the devaluations of 2018 and last August, as well as the recessionary context, generate problems of income and financial scenario of the groups of the Iberian country.

An example is what is happening with Codere, one of the main players in the gambling sector and whose social profile is highly dependent on its activities in the local market, where it controls 13 bingo halls, in the province from Buenos Aires.

Indeed, during the year 2018, he went through complicated times in the country, which impacted his annual balance, when he announced a fall of 40 million euros. of its final result. This was caused almost by the adverse effect of the exchange rate in Argentina, where revenues fell by 30%.

Now, and also because of the complicated domestic scenario and the volatility of the local market, the ratios and ratings of two credit agencies such as Moody's and S & P have resulted in a reduction in its ratios and ratings, which placed the company under surveillance in a "negative" perspective.

It has done so because the agency believes that it may be difficult to refinance a series of bonds totaling € 500 million and € 300 million (€ 272 million). euros).

In any event, S & P has maintained in "B-" the credit rating of the Spanish company at the level of speculation and known as "junk bond", for poor quality and poor long-term capacity. term, dependent on a favorable environment, as described in the main media of Spain.

The agency justifies the monitoring and the "negative" outlook precisely because it believes that it may have difficulty refinancing the secured bonds due in October 2021 and risk being negatively impacted by the strong appreciation of dollar after the August 11th STEP, as well as the exchange control measures and capital taken by the government to stop the flight of currencies.

"We see a high probability that it will not succeed in the next six months, if that happens, we could lower the rating," they warn, pointing out that Codere's revenues in Argentina accounted for 25% of gross profit of the company. 39, operating (Ebitda) group.

In the case of Moody's, the Codere rating has been lowered from B2 to B3, maintaining a stable outlook and arguing the potential impact of the situation Argentina faces after the primary elections., in the profitability and cash generation capacity of the group.

In any case, and despite these negative prospects, the company managed to increase its revenues in the last quarter. This is at least the result of the balance that has just been presented to Spanish stock market authorities and that shows an adjusted EBITDA of 70.3 million euros, or 8.2% more than that. 39 at the same time of the previous year.

Among the reasons, stand out the growth of its business in Mexico and Spain and the online business of the group, which managed to neutralize the negative signals that continue to arrive in Argentina due to the sharp depreciation peso and higher gaming taxes.

In this context, its operating profit amounted to 354.7 million euros, which represents a decrease of 5.7% compared to the same period last year, mainly due to a reduction of 29.9 million turnover. who come from Argentina.

But like its operations in Mexico, Italy and Spain and in the online business, it was able to close the second quarter of the year with an adjusted EBITDA of 70.3 million euros, against 65 million in the second quarter of 2018, which represents a considerable loss. increase by 2.5 points in the margin, which reaches 19.8%.

The balance sheet shows that the company's operating expenses decreased by 7.8% to 266.7 million euros, mainly due to lower costs in Argentina, the peso devaluation and the improvement. efficiency of Mexico, Spain and other markets.

In fact, Vicente Di Loretto, CEO of Codere, believes that the results reflect the process of change that the company has undertaken with the implementation of a "transformation plan" that confirms the expectations of profitability and the strength of Codere's main markets, despite the lesser contribution from Argentina ".
Even the country is losing weight compared to other more attractive markets for the company, such as Mexico and Uruguay, Latin America and Spain itself in Europe.

"The good performances of Mexico, Spain and Uruguay, as well as those of our online business, enabled the company to maintain its profitability in the second quarter of the year.", is indicated in the document Codere.

It is also remarkable that "the exposure of Argentina has been reduced from 131 million euros adjusted EBITDA in 2016 (nearly 50% of the consolidated value) to 65 million expected in 2019 (less than 25%), that the rest of the business units spent during this period 121 million euros to about 220 million euros ".

On the strength of these numbers, the company's executives said they were not worried about the change in credit ratings made by S & P, which, while maintaining its B rating, announced that it would make the # 39, subject to monitoring for the next six months (Credit-Watch Negative), when the group approaches the two-year period preceding the expiration of its obligations.

Expect a positive cash flow

Sources of the company consulted by Professional, ensure that the arguments put forward by the agency "meet strictly technical criteria on the duration of the refinancing, balancing the uncertainty generated in Argentina with the favorable evolution of the company and its ability to cope with scenarios unfavorable, due to macroeconomic or regulatory circumstances, generating growth. "

In this case as in that of Moody's, Codere spokespersons warned that they did not share the new qualifications, "knowing that the new report published does not accurately reflect the current situation nor the prospects of the society".

To reinforce the vision, Codere's executives maintain that the Moody's discount does not take into account what has already been reported regarding the impact of Argentina's situation on its results of the second quarter. They also reaffirm the company 's expectation of complying with the adjusted Ebitda guide for this year, "which implies both a significant improvement in EBITDA compared to the previous year. previous year and generating a positive free cash flow for this year ".

They further argue that Codere "has shown during the first six months of the year a decline in non-recurring expenses and investments in maintenance and growth (capex), thus improving prospects for cash generation. flows for the year ".

As a result, and contrary to the expectations of the rating agency, the company plans to generate a positive cash flow in 2019, especially since the last balance takes into account the fact that its Ebitdas, the geographical diversification of these two entities and cash generation, "they reach, in the middle of this year, their highest level since 2012, while the net leverage is at least 2.7x".

In addition, its spokespersons believe that Codere continues to implement its transformation plan, "Digitize its front and back offices and activate levers capable of generating significant growth in adjusted EBITDA over the next yearThis plan helped to reduce exposures in Argentina, which went from 131 million euros adjusted EBITDA (nearly 50% of the consolidation) to 65 million euros in 2019 (less than 25%). ), while the rest of the group spent during this period a contribution of 121 million euros to about 220 million euros, according to forecasts provided to the market for 2019.

"Codere hopes that in the coming months, the resolution of some of the uncertainties that remain today regarding the evolution of the macroeconomic scenario in Argentina will help advance the debt refinancing process, thus facilitating the revision. decisions now made by rating agencies, "adds the company.

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