Fitch Ratings has downgraded Farfetch Limited's Long-Term Issuer Default Rating (IDR) to 'D' from 'CC' and withdrawn it.

The downgrade reflects the sale of its business through a pre-pack administration process and its plan for liquidation.

Fitch has simultaneously assigned Surpique Acquisition Limited, an entity ultimately owned by South-Korean ecommerce group Coupang, Inc. and funds managed and/or advised by Greenoaks Capital Partners LLC, which acquired Farfetch's business, a 'CCC-' IDR. Fitch has also affirmed its senior secured term loan (TLB) rating at 'CCC-' but revised the Recovery Rating to 'RR4' from 'RR3'.

Surpique's 'CCC-' rating reflects its weak liquidity position as we believe the business it acquired is de-facto insolvent but assumes a one-notch uplift for its new strategic investor Coupang. We assume that Surpique's available liquidity may not be sufficient to cover business needs in the next 12 months. However, the uplift reflects our assumption of moderate strategic importance of the acquired assets for Coupang, committed equity support and potential further cash support to turn the business around once a new business plan has been developed.

Fitch is withdrawing the ratings of Farfetch as it expects to be liquidated after its operations were sold through a pre-pack administration. Accordingly, Fitch will no longer provide ratings or analytical coverage for Farfetch.

Key Rating Drivers

Strategic Investor Credit-Positive: The presence of a strategic investor in Coupang is overall positive for Surpique's credit profile. We see strategic value to Coupang in Surpique's assets and business proposition, based on the investor's total equity commitment of USD500 million, of which USD200 million remains available over the next 12 months. At the same time, we lack at this stage details of Coupang's turnaround strategy and asset development plan for Surpique, and how much support would be needed and would be made available to the company. We believe Coupang lacks expertise in the luxury sector and Surpique's main markets but the latter can benefit from Coupang's operational expertise and efficiency.

Uncertain Parent-Subsidiary Linkage: The 'CCC-' IDR is based on our parent-subsidiary linkage assessment of a stronger parent Coupang and weaker subsidiary Surpique. Despite uncertainty around Surpique's legal, strategic and operational ties with Coupang at present, we see moderate strategic importance for Coupang but weak operational and legal ties between the two entities. This leads to a bottom-up approach with a single-notch uplift from Surpique's Standalone Credit Profile (SCP) of 'cc'.

Although we do not currently anticipate tighter legal links, the provision of guarantees for Surpique's TLB, fully integrated management and treasury functions, may lead to an equalisation of credit profiles and a rating upgrade. Conversely, we may consider rating Surpique on a standalone basis if no further cash support is provided and we receive evidence of limited strategic incentives to support the business.

Limited Funds to Shore up Liquidity: Surpique's short-term liquidity is supported by the USD300 million of equity already provided by the new shareholder, with another USD200 million remaining available as cash equity injection. Nevertheless, we believe Surpique may need additional cash support to avoid a liquidity crisis in the next 12 months as free cash flow (FCF) is negative.

Business Plan to be Devised: Surpique has not shared any updated business plan and we assume its medium-term strategy could take time to be devised under Coupang's ownership. We believe that under the current business set-up, Surpique will continue to make losses and burn cash and a turnaround strategy is necessary to build a path to profitability.

ESG - Absence of Turnaround Plan: The rating is negatively affected by the absence of a new turnaround plan. We also see material execution risks in view of still uncertain prospects for Surpique to regain a commercially viable business model.

ESG - Financial Transparency and Disclosure: The rating is negatively affected by our assessment of Surpique's quality and timing of financial disclosure, which does not allow investors to assess on a timely basis the company's financial position. Transparent disclosure of Surpique's current economic and financial position in combination with a credible business plan are instrumental to our assessment of its medium-term credit quality.

Derivation Summary

Surpique is the leading global platform for the luxury fashion industry and shares some traits with consumer goods and non-food retail companies as it sells products online and through directly operated retail stores. Fitch does not rate direct competitors of Surpique.

However, we have considered companies such as Golden Goose S.p.A. (B+/Stable) and Birkenstock Financing S.a.r.l (BB/Stable) in the luxury shoes/sneakers space, Levi Strauss & Co. (BB+/Stable) and Capri Holdings Limited (BBB-/RWN) in the branded apparel space and Amazon.com, Inc (AA-/Stable) in the e-commerce space for our analysis. All these are more mature businesses with proven EBITDA and cash flow generation.

Key Assumptions

Fitch will update its key assumptions after an updated strategy is provided.

Recovery Analysis

The recovery analysis continues to assume that Surpique would be reorganised as a going-concern (GC) in bankruptcy rather than liquidated. We estimate Surpique's post-restructuring GC EBITDA at USD100 million, assuming a credible turnaround plan is devised, which would allow the business to regain commercial viability. We have used a 3.0x enterprise value/ EBITDA multiple, which is low and reflects significant uncertainty around the achievement of the GC EBITDA.

After deducting 10% for administrative claims from an estimated GC enterprise value of USD300 million, our principal waterfall analysis generates a ranked recovery for the senior secured USD633 million TLB (together with capitalised fees), issued by Farfetch US Holdings, Inc. in the 'RR4' category, leading to a 'CCC-' rating for the TLB, in line with its IDR. The waterfall analysis output percentage based on metrics and assumptions is 43%.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Evidence of stronger strategic, operational and legal links with Coupang confirming its commitment to support the business

Provision of an updated business plan, showing a clear path to profitability

Sufficient liquidity to cover medium-term business needs and debt service

Factors that Could, Individually or Collectively, Lead to Downgrade

Near-term liquidity crisis, leading to inevitable TLB payment default, or evidence of a debt restructuring, which Fitch may view as a distressed debt exchange

Liquidity and Debt Structure

Liquidity Reliant on Strategic Investor: We believe that medium-term liquidity is reliant on support from Coupang, while Surpique's path to profitability and internal cash flow generation is uncertain and subject to a yet-to-be completed turnaround plan.

Issuer Profile

Surpique is the global leading marketplace for personal luxury fashion, including clothes and accessories, with an annual gross market value of USD4.1 billion in 2022.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Surpique has an ESG Relevance Score of '5' for 'Management Strategy' due to an ineffective and poorly executed corporate strategy and the absence of a turnaround plan. This has a negative impact on the credit profile and is highly relevant to the rating.

Surpique has an ESG Relevance score of '5' for 'Financial Transparency' due to Surpique's quality and timing of financial disclosure, which does not allow investors to assess on a timely basis the company's financial position. This has a negative impact on the credit profile and is highly relevant to the rating.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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