Investing.com -- Moody’s Ratings has downgraded the long-term corporate family rating (CFR) and the probability of default rating (PDR) of SIG plc to B3 from B2 and B3-PD from B2-PD, respectively. The ratings of the company’s backed senior secured notes have also been downgraded to Caa1 from B3. The outlook for SIG has been revised to stable from negative.
The downgrade is a response to SIG’s weak performance in the face of challenging market conditions, marked by subdued construction and refurbishment activities and increased competition. Despite expectations of a recovery in SIG’s key markets in the latter half of 2025 and into 2026, high interest expenses and lease payments are projected to result in weak interest coverage and sustained negative free cash flow over the next 12-18 months.
In 2024, SIG’s like-for-like revenue decreased by 4% due to lower volume and price deflation in key segments, including UK Interiors, France, and Germany. The company’s EBITDA, adjusted by Moody’s, fell by 21% to £96 million and its EBIT margin decreased to 0.5% from 1.4% in 2023. This led to a rise in Debt/EBITDA to 6.6x from 5.4x and a decrease in EBITA/Interest Expense to 0.4x from 1.1x.
Over the next 12-18 months, Moody’s anticipates SIG’s EBITDA to increase by up to 20% due to increased volumes and margin improvements from the company’s restructuring and cost-saving initiatives. However, EBITA/Interest Expense is expected to remain weak at 0.6x-0.9x due to higher interest expenses following the November 2024 refinancing and higher interest on lease liabilities.
SIG’s free cash flow generation weakened significantly in 2024, with an outflow of £33 million, down from nil in 2023 and £12 million in 2022. This was due to reduced operating profit, net working capital outflows, substantial lease payments, and costs related to restructuring and refinancing. Free cash flow is expected to remain negative until EBITDA significantly recovers.
Despite these challenges, SIG’s B3 CFR is supported by its leadership position as a specialist building materials distribution company, good geographic diversification, significant exposure to the renovation market, and a relatively flexible cost structure. The company’s liquidity is considered adequate, supported by a cash balance of £87 million as of December 2024 and a fully undrawn £90 million revolving credit facility maturing in April 2029.
The stable outlook is based on expectations of a recovery in market conditions starting in the second half of 2025 and continuing into 2026, leading to a gradual improvement in EBITA/Interest Expense towards 1.0x. The absence of significant debt maturities until 2029 also supports the stable outlook.
Factors that could lead to an upgrade or downgrade of the ratings include a reduction in Debt/EBITDA to below 6.0x, an increase in EBITA/Interest Expense towards 1.5x, maintenance of an adequate liquidity profile, alongside positive free cash flow generation, or a significant deterioration in liquidity due to persistently negative free cash flow.
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