Despite reporting a nominal operating profit in the second quarter of fiscal 2016, Netherlands-based general merchandise and food retailer Hema's profitability remains very low. In our view, while profitability could increase, there will not be sufficient free cash flow to result in meaningful deleveraging prospects. This, combined with very high debt, will likely result in an adjusted leverage above 13x (around 7.5x excluding shareholder loans; reported gross debt leverage of circa 9.6x) for the coming financial year. We view Hema's high leverage as unsustainable in the long term and, absent a rapid turnaround, this exposes the group to substantial refinancing risks in just over two years. We are lowering our long-term corporate credit rating to 'CCC+' from 'B'. The stable
