alain afflelou: initiation of coverage initiation of

24 July 2015 Credit Research

Credit Flash – HY Consumer

UniCredit Research page 1 See last pages for disclaimer.

Alain Afflelou: initiation of coverage ■ We initiate coverage on the senior secured AAFFP 5.625% 4/19

(EUR 365mn) and senior unsecured AAFFP 7.875% 4/19 (EUR 75mn) issues with a buy recommendation. After the announcement of weak 1Q14/15 results at the end of Dec 2014, the cash prices of the AFFP 5.625% and the AAFFP 7.875% issues plunged to 84 and 75.5 respectively in Jan 2015. 2Q14/15 and 3Q14/15 results improved, which was reflected by an increase of 13 cash points. The issues are trading below par (@100) and below the call prices (10/15/2015: AAFFP 5.625% 4/19 @102.813; AAFFP 7.875% 4/19 @103.94%). In our view, Alain Afflelou (AAFFP) will be able to manage the tougher regulatory environment in France. We think that recent amendments to thresholds on reimbursement for optical products in France will impact revenue and EBITDA in the low single-digit range; customers will only postpone their purchases. Given expected slightly weaker credit metrics in FY14/15, moderate deleveraging in FY15/16 should be supported by limited positive FCF generation, adequate liquidity, the continued recovery of the Spanish market and a lower comparison base yoy. We expect no rating pressure. Moody’s and S&P have confirmed their stable outlooks and ratings in June and July 2015, respectively.

■ The main triggers for the credit profile: 1. success in deleveraging (net debt/EBITDA: LTM 9M14/15: 6.0x, FY13/14: 5.6x, co. def.) due to positive free cash flow, no dividend payment, limited working capital outflow and only small bolt-on acquisitions. 2. following a strategic turn to closed networks, success of AAFFP franchises in tenders (selective discounts for higher volumes) to increase the customer base; 3. earnings improvement of directly owned stores (negative EBITDA, accounting topic); 4. continued recovery (lfl network sales) in Spain; 5. no further lowering of reimbursement caps in France 6. only bolt-on acquisitions.

■ Review 3Q14/15 results (ending 30 April 2015): In 3Q14/15, revenue and EBITDA improved by 4.6% (EUR 77.2mn) and 0.6% (EUR 15.6mn) respectively, but YTD figures were still impacted by a difficult 1Q14/15. AAFFP generated FCF of EUR 7.1mn (LTM 9M14/15, UniCredit calculation) despite working capital outflow of EUR 7.8mn (LTM 9M14/15, UniCredit calculation). At 30 April 2015, liquidity consisted of EUR 30mn of a super senior RCF (undrawn) and a cash position of EUR 15mn. As of 30 April, net debt (co. def.) slightly decreased qoq to EUR 431mn (31 Jan 2015: EUR 434.3mn, 30 April 2014: EUR 427.9mn). LTM 9M14/15 adj. net debt leverage (incl. convertible, off balance sheet adjustments) was 9.7x (FY13/14: 8.6x, UniCredit calculation).

■ AAFFP, headquartered in Paris, is the third largest optical retailer in the French market by total sales and the number two optical retailer in Spain by number of stores/sales. With its 1,185 stores across eleven countries, it operates mainly franchise activities with 993 stores by providing a number of services to its network of stores in exchange for various fees or commissions. It also operates directly owned stores (192), in which AAFFP regularly tests new commercial initiatives and sets best practices for the franchised stores. The group was founded in 1972 by Alain Afflelou. Lion Capital (69.5%) and Apax France (14.1%) acquired the group in 2012. Alongside management’s 2.6%, Alain Afflelou holds 13.8%. In LTM 9M14/15, revenue of EUR 320mn stemmed mainly from franchise activities (around 68%), and adj. EBITDA was EUR 72mn (co. def.)

Recommendation Initiation of coverage: Buy Major bond issues Mat Cpn Price AAFFP (B2/B/BB-) Apr 19 5.625 96/98 AAFFP (Caa2/CCC+/CCC+) Apr 19 7.875 87.5/90.5 Rating: Lion / Seneca France 2 SAS (parent of Alain Afflelou) L-T Outlook Moody's B3 STABLE S&P B STABLE Fitch B STABLE Company website www. alainaffleou.com Financial calendar 2015 2014/15 results: November

UNICREDIT HY HEALTHCARE UNIVERSE

AAFFP SPREAD PERFORMANCE

Source: iBoxx, Bloomberg, UniCredit Research

Author Dr. Silke Stegemann, CEFA (UniCredit Bank) +49 89 378-18202 [email protected] Bloomberg UCGR Internet www.research.unicredit.eu

AMPIM 4.875% 7/18

AAFFP 5.625% 4/19

SAZGR 2.25% 6/18

PHARGR 3.125% 5/20 PHARGR

3.625% 7/21

FMEGR 5.5% 7/16

FMEGR 6.5% 9/18

FMEGR 5.25% 7/19

FMEGR 5.25% 2/21

FREGR 4.25% 4/19

FREGR 2.875% 7/20

FREGR 3% 2/21

FREGR 4% 2/24FREGR 2.375%

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iBoxx High Yield Non-Fin (cum crossover)iBoxx EUR High Yield main Non-Financials cum crossover LC BAAFFP 5.625% 4/19 AAFFP

5.625% 4/19

iBoxx EUR High Yield B

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Credit Flash - Alain Afflelou


Key credit points Good market position as optical retailer in France and Spain Limited geographical diversification Small revenue base Revenue focus on optical retail

Alain Afflelou (AAFFP) is the third largest optical retailer in France and the number two optical retailer in Spain. 78% of its network sales come from France, and 15% come from Spain. AAFFP sells frames, contact lenses, sunglasses and corrective lenses. The company manages two complementary businesses: the franchisor activity, which drives nearly all of the group’s profitability, and directly owned stores, which serves strategic purposes, such as testing new commercial initiatives. Its optical retailer network consisted of 1,185 stores as of 30 April 2015, including 993 franchised stores and 192 directly owned stores across 11 countries: primarily France (91); Spain (100) and adjacent countries (Portugal, Belgium, Luxembourg, Switzerland, Andorra, Morocco, Lebanon, Algeria, Ivory Coast). AAFFP is the largest optical franchisor and the third largest optical banner in terms of network sales in France (11% market share) and the second largest optical retail chain in terms of network sales in Spain (market share 7%). As of 30 April 2015 (LTM 9M14/15), AAFFP generated around EUR 320mn of group revenue (franchise activity: 68% of revenue). Franchise activities include a number of services to its network of stores and its suppliers in exchange for various fees or commissions. In LTM 9M14/15, total network sales (sales for the whole store network) stood at EUR 649mn and EBITDA was at EUR 72mn.

AAFFP: REVENUE COMPOSITION (LTM 9M14/15: EUR 320MN) AAFFP: FRANCHISE REVENUE (FY13/14: EUR 243MN)

AAFFP: NETWORK SALES BY COUNTRY (FY13/14: EUR 643MN) AAFFP: STORE NETWORK (FY13/14: 1,174 STORES)

Source: Alain Afflelou, UniCredit Research

Directly owned32%

Adjusted franchisor revenue

68%

entry fees and royalties

10%

Listing9%

Licensing8%

Trading14%

Purchasing33%

Communication26%

France78%

Spain15%

Portugal1%

Belgium3%

Luxembourg0%

Switzerland2%

rest1%

ALAIN AFFLELOU in

France62%CLARO by

AFFLELOU6%

ALAIN AFFLELOU in

Spain24%

ALAIN AFFLELOU in

Portugal2%

ALAIN AFFLELOU in other countries

6%

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Franchise business model offers some resilience

AAFFP’s franchise business model offers some resilience to economic cycles and drives nearly all of the group’s profitability.

Entry fees and royalties Listing Purchasing Communication

■ Entry fees and royalties (10% of franchise revenue in FY13/14): These comprise initial one-time entry fees for each new store a franchise opens (EUR 29,300 on average for newly franchised stores in FY13/14) and on-going annual royalties as a percentage of a franchisee’s monthly sales.

■ Listing (10% of franchise revenue in FY13/14): Stores in the network are required to purchase all products sold in their stores exclusively from suppliers listed by its central listing and payment unit. In exchange for its listing and payment services, AAFFP charges listed suppliers listing fees, which are calculated as a percentage of a listed supplier’s sales to stores in the network.

■ Wholesale and exclusive products (34% of franchise revenue in FY13/14): Revenue is generated by providing wholesale services to stores in its network through its central purchasing units, which act as wholesalers of exclusive products and license AAFFP’s brand names to certain suppliers to manufacture lenses and contact lenses for its network.

■ Communication fees (27% of franchise revenue in FY13/14): The group’s advertising and communication strategy supports the promotion of its brands, product offerings and commercial offers.

High brand awareness Regular new product launches

High brand awareness is supported by marketing and advertising expenditures. AAFFP has a good track record in product development. 1. According to AAFFP, it has a high brand awareness in France (99%), Spain (87%), Belgium (89%) and Switzerland (80%). The key to its marketing strategy is related to Alain Afflelou. An increase in advertising cost has, on the one hand, a negative impact on operating results but, on the other hand, is needed to promote the brand and to retain customer loyalty. 2. AAFFP also has a good track record of innovative product launches: La Forty (1997), a package of four pairs of reading glasses in four different colors; L’Ephémère (2002), the first daily contact lenses for EUR 1 per pair; iconic Tchin Tchin commercial offer (1999) encouraged customers to own multiple pairs of glasses by offering customers a second pair of glasses for EUR 1. Recently, it has started displaying its AFFLELOU signature label on its proprietary frames and sunglasses.

Highly competitive and fragmented market High promotion expenses Strong market share: France: 11% Spain: 7%

The optical retail market in France and Spain is highly competitive. AAFFP needs to spend heavily on advertising and promotion to maintain competitiveness. AAFFP is the largest optical franchisor and the third largest optical banner (11% market share) in terms of network sales in France, behind Optic 2000 (14%) and Krys (13%). It is also the second largest optical retail chain in terms of network sales in Spain (market share 7%), where it started operating in 2003 with the acquisition and integration of the Carrefour store network. The network of franchised and directly owned stores operates under its ALAIN AFFLELOU and CLARO banners. In Europe, the main players in the industry include Hal Trust, Specsavers, Fielmann, Boots Opticians, Optic 2000, Krys and Luxottica.

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STORE COUNT OF COMPETITORS IN FRANCE (FY12) STORE COUNT OF COMPETITORS IN SPAIN (FY12)


Group history Recent M&A activity

Group history: The group was founded in France in 1972 by Mr. Alain Afflelou. After two previous LBOs in 2000 and 2006, Lion Capital (69.5%) and Apax France(14.1%) acquired the group in 2012. Mr. Afflelou retained 13.8% and management 2.6% following that transaction. Lion Capital is the majority owner (69.5%).The other shareholder is Apax Partners (14.1%).

Review of M&A activity – focus more on bolt-on acquisitions: At the end of May 2015, AFFP increased its existing stake in Optivisao Group from 20% to 25%. It plans to further increase the position to around 30%. In addition, discussions have begun with three other major Optivisao shareholders (each accounting for approximately one-sixth of the equity) with the aim to acquire a controlling interest in the Optivisao Group. Optivisao is a franchisor network of more than 250 stores in Portugal, generating annual network sales of approximately EUR 60mn. Discussions with potential partners to open franchised stores through master franchise agreements in Chile and in China are also still ongoing, the company highlighted in its 3Q14/15 report.

ALAIN AFFLELOU: ACQUISITIONS AND DISPOSALS

Date Deal Dec-10 a subsidiary of 3ABOD acquired 3ABOE (holding company for purchasing unit for lenses in France), consolidation since Jan 2011,

revenue: EUR 39.8mn, net income EUR 1.6mn Jul-11 F2L (holding company of 48 directly owned stores in Spanish central purchasing unit) was acquired by a 3ABOC subsidiary, consolidation

29 July 2011, revenue: EUR 29.6mn, net income: EUR 4.1mn

Jan-12 FP2A (holding company of 69 directly owned stores in France was acquired by 3ABOD), consolidation Jan 2012, revenue: EUR 29.1mn, loss: EUR 1.9mn

Jul-13 Lion/Seneca France Audio (owned by shareholder AA) became the master franchisor for the Alain Afflelou Acoustidien network in France hearing aid business, EBITDA: EUR -4.1mn loss in FY13

Source: Alain Afflelou offering memorandum, UniCredit Research

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806338

706448

189206

4841

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Optic 2000KrysAtol

Vision PlusALAIN AFFLELOU

Generale D'OptiqueOptical Center

LissacCLARO by AFFLELOU

Optique LeclercOptical Discount

Tes Opticiens ConseilBordelaise De Lunetterie

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39

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General Optica

Optica 2000

Vision Lab

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Optimil

Cottet Opticos

Vista Optica

Soloptical

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French optical reimbursement system Support from French optical reimbursement system Shortest renewal cycle in Europe Private health insurance covers 65% of expenses 90% of the French population is covered by private health insurance plans

Credit support from the French optical reimbursement system and the shortest renewal cycle in Europe (2-3 years). The French optical retail market is the largest in Europe (EUR 5.5bn in FY13). Approximately 90% of the French population is covered by private health insurance plans. While the social security system reimburses only approximately 5% of end-customers’ optical expenses, widespread private health insurance companies’ (“OCAMs”, Organismes Complementaires d’Assurance Maladie) policies generally reimburse approximately 65% of such expenses. Alain Afflelou benefits from the prevalence of private health insurance reimbursement in France as this means that customers tend to be less sensitive to price. However, the social security system also plays a significant role, as reimbursement by OCAMs in France (is conditional upon prior reimbursement by the social security system on the basis of prescriptions from ophthalmologists).

In France, more than half of the insured population is covered by a care network, which acts as an intermediary between OCAMs and healthcare professionals, including opticians. Customers purchasing optical products from a store that has joined a care network will benefit from third party payment (reimbursement of optical expenses made by the relevant OCAM through direct payment to the optician).

Recent regulatory changes in France Several regulatory changes in France: Leroux Law Haman Law Social Security Bill

The French optical retail market benefits from attractive reimbursement. However, since the end of 2013, the sector has been exposed to several regulatory changes.

1. Leroux Law: permitted differential reimbursements by mutual health insurance companies depending on whether they go to an optician within a care network or to any optician of their choice

2. Haman Law: facilitating the sale of optical products, including through the internet

3. Law on the financing of the Social Security System (2015 Social Security Bill): imposing thresholds for private health insurance reimbursements and extending the reimbursement cycle to two years. Reimbursement caps of EUR 450 for a pair of glasses, including simple lenses, EUR 850 for complex lenses and EUR 150 for frames were put in place

All these changes seek to curb consumer spending on optical products, by imposing thresholds for private health insurance reimbursements, introducing a renewal cycle of only one pair of glasses over a two-year period, encouraging the use of online sales channels and permitting reimbursements by mutual health insurance companies.

Alain Afflelou’s reaction: Focus on closed networks

Alain Afflelou’s change of strategy: Management has decided to revise its strategy regarding closed networks (which have tighter rules governing the types of products and services reimbursed and level of price rebates granted) and to proactively assist opticians in its network to submit bids to join such care networks. Previously, management had the preference for a more open system. This change of strategy was partly based on various studies that showed an increase in the number of customers buying glasses through closed networks. The proportion of these customers reached 26% in 2015, compared to 18% in 2014, and 9% at the end of 2011 and is expected to increase (to 50% by 2018). Over 200 Afflelou franchises had successfully responded to tenders from care networks Santéclair and Itelis by the end of 2014, granting access to a combined customer base of 16mn people. More than 550 Afflelou stores are part of Optistya, which has approx. 4mn members. Tenders from Seveane and Kalivia (largest care network in France, 11mn members) at the end of 2015 offer a further opportunity to increase network sales. However, franchise gross margin will decline going forward (S&P assumes: by 5% to around 62%).

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Offers for opticians who are not part of care networks New “Win Win” strategy

Management is also working on alternative offers to enable opticians who are not members of closed networks to attract new customers who are not part of care networks. At the beginning of June 2015, Alain Afflelou launched its new offer, “Win Win”, which represents an alternative to closed networks, enabling customers to purchase their glasses by paying a monthly flat rate (starting from EUR 11.90) over a two-year period. This offer also includes free replacement lenses if the customer’s prescription changes.

General trends in the optical market

Steady market growth in France and Spain AAFFP showed better sales trend than competitors Jan to March 2015 Depressed consumption levels in Spain Recovery in Spain

Slow but steady market growth in the optical retail market in France and Spain in recent years. According to SWV (SWV Strategy with Vision GmbH & Co), the optical retail market in France is expected to grow at similar rates of 0.6% p.a. over 2013-17 (total sales in FY13: EUR 5.5bn) as in the past. Despite the economic downturn, the market for optical products in France has proved to be relatively resilient, with a compound annual growth rate (CAGR) of 0.6% for the period 2008-13, due to the supportive regulatory environment. The renewal cycle for optical products in France was 2.6 years in 2012 and, according to SWV, is expected to decrease further to 2.5 years by 2017, which is credit positive. In first four months of 2015, Alain Afflelou showed a better sales trend (+0.4%) than the general market (-1.5%, according to data from Obervatoire de l’Optique).

In Spain, depressed consumption levels (CAGR -3.4% between 2008 and 2013) and a lengthening of the renewal cycle (4.1 years in 2013) are exacerbated by the fact that optical products are generally not reimbursed, so an economic downturn has a greater impact on the Spanish optical retail market than that of France. In Spain, sales in the optical sector increased by 5.5% according to GfK and 2.0% according to SWV in 2014. The optical sector has continued to recover strongly since the beginning of 2015, reflecting improved economic conditions. GfK figures show a positive total variation of +10.4% since the beginning of 2015. SVW estimates that the market is expected to increase by 1.9% over the 2013 to 2017 period.

OPTICAL RETAIL MARKET IN FRANCE OPTICAL RETAIL MARKET IN SPAIN


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CONSUMER CONFIDENCE (SPAIN, FRANCE, EUROZONE) UNEMPLOYMENT RATE (SPAIN, FRANCE, EUROZONE)

Source: Alain Afflelou, Bloomberg, UniCredit Research

Support from generally good underlying market prospects: Ageing population TV, smartphones, computers High reimbursement for glasses Increasing health awareness

■ Alain Afflelou benefits from the general growth prospects in the optical market, including demographic change, social trends and technological innovation.

■ Demographic change: In France the overall population is expected to continue to increase and the percentage of adults over 45 years of age is forecast to increase from 43% to 45%. Persons over 45 years of age are more likely to suffer from presbyopia and require vision correction. In Spain, demographic tailwinds are also supported by an aging population, with the proportion of adults over 45 forecast to increase from 43% to 48% over the 2012 to 2017 period.

■ Social trends: Consumers are increasingly exposed to digital displays during the course of their work and leisure time, which may lead to earlier development of vision deficiencies. Additionally, consumer awareness concerning eye health has increased. Alain Afflelou believes that frames have become a fashion accessory leading consumers to purchase and possess multiple pairs or buy new optical products more frequently.

■ Technological innovation: The spectrum of consumer choice has increased with the introduction of progressive lenses, different varieties of lens coatings, such as anti-scratch and anti-fog, and lightweight frame materials such as titanium.

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Credit profile development 3Q14/15 results Positive network sales and the revenue trend, which started in 2Q14/15, continued in

3Q14/15. On a quarterly basis, the company showed a rebound in 3Q14/15 with an improvement in total network sales by 2.2% yoy (1Q14/15: -6.6%, 2Q14/15: +2.5%) and lfl growth of 0.6% (1Q14/15: -7.1%, 2Q14/15: 2.4%). From a business perspective, in 3Q14/15, Franchisor revenue increased by 1.2% (2Q14/15: 0.6%) and directly owned stores revenue by 12.9% (2Q14/15: 6.9%). From a regional perspective, lfl network sales improved in France by 0.1% (1Q14/15: -9.1%, 2Q14/15: +1.8%) and in Spain by 4% (2Q14/15: +9.2%, 1Q14/15: stable yoy). At 3Q14/15, total group EBITDA remained nearly stable at EUR 15.6mn. Directly-owned stores’ EBITDA in 3Q14/15 was slightly weaker yoy (EUR -1.9mn) still negatively affected by lower lfl sales in France and a reduction in gross margin in both regions. Franchisor EBITDA improved by 3.4% to EUR 17.5mn in 3Q14/15.

ALAIN AFFLELOU: NETWORK SALES TREND (9M14/15) ALAIN AFFLELOU: STORE COUNT TREND (9M14/15)

Source: Alain Afflelou, UniCredit

Improving lfl network sales Improving lfl network sales. Since 2011/12, network sales on a lfl basis have remained negative reflecting the challenging market environment in France and Spain. A portion of the company’s franchise revenue is directly correlated with network sales through royalties or communication fees it receives as a percentage of network sales. In 2012/13, network sales on a lfl basis plunged by 4% and recovered slightly in 2013/14 to -2.6%. The full-year result 2013/14, with a lfl net sales decline of -2.6%, suffered from a weak 4Q13/14 with -6.4%. On a quarterly basis, lfl network sales improved from negative territory in 1Q14/15 (-7.1%) to +0.6% in 3Q14/15 and to +2.5% in 2Q14/15 (9M14/15: -1.3%, 9M13/14: -1.2%).

Store count

AA Spain

Jul-14 AAFrance

AA Portugal

Other countries

Apr-15

1,174

6

+2

1 1,1850

2

Claro

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NETWORK SALES VERSUS REVENUE (YEARLY) NETWORK SALES VERSUS REVENUE (QUARTERLY)

Source: Alain Afflelou, UniCredit

Negative impact on sales and EBITDA of directly owned stores

The portion of sales derived from directly owned stores has increased since FY12/13, as the company bought back underperforming stores from franchisees. Over the same period, the EBITDA loss of directly owned stores has increased. Directly owned stores exhibit a higher level of fixed costs and higher capital intensity due to working capital and capex commitments. The increased sales composition to directly owned stores is credit negative due to its higher impact of economic downturn, compared to franchised stores. The EBITDA loss associated with own stores has also increased and has weighed negatively on the group’s earnings. Group EBITDA between 2010/11 and 2013/14 fluctuated between EUR 67mn and EUR 76mn. Adj. EBITDA margin declined to 23.5% in 2013/14 from 34.8% in 2010/11 mainly driven by a change in the mix between franchised and directly operated stores.

REVENUE: DIRECTLY OWNED STORES VERSUS FRANCHISED STORES DIRECTLY OWNED STORES EBITDA LOSS INCREASED


Positive free operating cash flow

Operating free cash flow generation has been positive. It is credit-positive that Alain Afflelou’s franchise business allows for low working capital and capex requirements. Between 2010 and 2011 and in LTM 9M14/15, the company showed a high cash conversion rate (FFO: operating cash flow before changes in working capital in relation to EBITDA, UniCredit calculation, of 61%). Alain Afflelou reported, on average, FFO of EUR 44mn, capex (UniCredit def.) of EUR 12.8mn and no dividend payments. Free cash flow (after dividends/M&A) was positive (except for 2012/13). Alain Afflelou showed limited working capital outflows, mainly for seasonal working capital requirements linked to the build-up of inventory in French and Spanish directly owned stores for spring/summer (sunglasses).

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Adjusted EBITDA Adjusted franchise EBITDAAdjusted directly-owned stores EBITDA Adjusted franchise EBITDA marginAdjusted EBITDA margin

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FREE OPERATING CASH FLOW POSITIVE


UniCredit net debt adjustments In FY13/14, Alain Afflelou reported off-balance sheet commitments of EUR 66mn. This includes lease commitments of EUR 44.4mn, sundry guarantees to third parties of EUR 9mn and securities and bank guarantees of EUR 12.5mn. When calculating adjusted net debt, we also take into account existing pension liabilities, for example. In FY13/14, Alain Afflelou had pension liabilities of EUR 1.1mn (FY12/13: EUR 1.1mn).

Refinancing in early 2014 The company refinanced its long-term debt (except for the convertible bond) in early 2014 through the issuance of EUR 365mn Senior Secured Notes by 3ABOD (3AB Optique Development) and EUR 75mn Senior Notes by LSF2 (Lion Seneca France 2). There is no debt amortization until the notes will mature in 2019. The refinancing closed on 6 May 2014. The notes give the company greater flexibility and optimize its cost of debt, which has an average rate of 6%. In addition, the company entered into a EUR 30mn superior senior RCF (Euribor +3%, maturing 2018). The refinancing includes the following:

■ EUR 365mn 5.625% Senior Secured Notes due 2019

■ EUR 75mn 7.875% Senior Notes due 2019

■ EUR 30mn Revolving Credit Facility (all of which is currently undrawn)

FINANCIAL DEBT CALCULATION

EUR mn 2012/13 3Q13/14 2013/14 3Q14/15 Short-term financial debt (I) 13.9 17.2 8.2 3.4 Senior debt Tranche A 8.8 10.5 - - Senior debt Tranche B - - - - Senior secured notes - - 4.8 0.9 Senior notes - - 1.4 0.3 Amortization of borrowing costs -5.8 -5.8 -2.4 -2.4 FP2A Group finance leases 2.1 1.3 - - LOA Group finance leases - - 1.24 0.55 Medium-term loans 0.2 0.2 0.2 0.3 Bank overdrafts 1.8 3.0 0.5 0.8 Assignment of trade receivables 6.9 8.0 2.3 3.0 Security deposits - - - -

Long-term financial debt (II) 554.9 579.5 623.4 649.1 Total convertible bond (ex equity component) 161.6 182.4 189.4 213.8 Mezzanine debt 115.5 119.7 - - Senior debt Tranche A 57.8 52.5 - -

-20-10

010203040506070

FFO (Fundsfrom

operations)

Change inWorkingCapital

reported

OperatingCash flow after

Changes inWorkingCapital

Capex Free operatingcash flow

EU

R m

n

2010/11 2011/12 2012/13 2013/14 LTM9M14/15

-600

-500

-400

-300

-200

-100

0

100

Free operatingcash flow

Acquisitions (net) Dividendpayments

Free cash flow(after div./M&A)

EU

R m

n

2010/11 2011/12 2012/13 2013/14 LTM9M14/15

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EUR mn 2012/13 3Q13/14 2013/14 3Q14/15 Senior debt Tranche B 240.0 240.0 - - Senior notes secured - - 365.0 365.0 Senior notes - - 75.0 75.0 Amortization of borrowing costs -23.1 -18.7 -8.9 -7.2 Medium-term loans 0.6 1.2 0.4 0.3 Security deposits 2.5 2.4 - -

Total financial debt (I + II) 568.8 596.5 631.6 652.5 - cash/cash equivalent 12.0 8.6 23.0 15.0

Net debt (UniCredit) 556.8 588 609 637 Debt adjustment (pension, operating leases, others) UniCredit calculation

54 54 61 61

Total debt (Alain Afflelou) 434.2 436.5 451.4 446.0 Net debt (Alain Afflelou) 422.2 427.9 428.4 431.0


Liquidity Alain Afflelou’s liquidity position is supported by the EUR 30mn super senior RCF (undrawn), its cash position and the sound free cash flow generation (UniCredit assumption: EUR 8mn in 2014/15 and EUR 14mn in 2015/16). Moody’s expects that the revolving credit facility remains undrawn. The revolver contains a minimum EBITDA maintenance covenant (EBITDA of the prior 12 months > EUR 45mn) that is activated if it is drawn by EUR 5mn. Moody’s expects headroom under this covenant to remain significant. In addition, coupon payments of EUR 10.27mn (EUR 365mn, 5.625%) and of EUR 3mn (EUR 75mn, 7.875%) in April and October are important for the quarterly liquidity analysis. According to seasonality, the business is quarterly fairly balanced with 4Q mostly the strongest quarter.

CAPITALIZATION (30 APRIL 2015)

Debt Instrument Ccy Interest Maturity First call Outst. (EUR mn) Leverage

Moody's* S&P*

Revolving Credit Facility EUR Euribor 3 month +300bp

2018 -

0 - - 70-90%

Senior Secured Notes EUR 5.625% April 2019 Oct- 15 @ 102.81250%

365 5.0x 50-70% (LGD 3)

50-70%

Other debt (medium-term loans, bank overdrafts, assignment of trade receivables, security deposits)

EUR 7

Total Senior Secured Debt EUR 372 5.1x n.a. n.a. Senior unsecured due 2019 EUR 7.875% April 2019 Oct- 15, @: 103.9375% 75 1.2x 0-10%

(LGD6) 0-10%

Total Senior Unsecured Debt 75 1.0x Total senior debt EUR 447 6.2x Convertible bond EUR 14% PIK Jul 2017 214 Total debt EUR 661 9.1x Cash & cash equivalent EUR -15 Total net debt EUR 646 8.9x EBITDA (LTM 9M14/15)** EUR 73

*Recovery Rate, ** UniCredit adj. Source: Moody's, S&P, company data; UniCredit Research

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Development of credit profile Expected development of credit profile: After slightly weaker credit metrics expected in FY14/15, we anticipate slow deleveraging in FY15/16.

■ We expect stable revenue in FY14/15 (-1%, EUR 321mn) and a slight increase in FY15/16 (+2% to EUR 330mn). We anticipate further revenue increase for the directly owned stores due to new store openings. Franchise revenue should be weaker in FY14/15 (UniCredit estimate: -4%). Franchise revenue should also improve in FY15/16 due to better communication revenues. Also, EBITDA (rep.) should be slightly weaker yoy in FY14/15 (EUR 72mn) and improve to EUR 75mn in FY15/16. The marketing initiatives and the company’s presence in a closed network should improve the operating result.

■ We expect moderate positive free cash flow generation in FY14/15 (UniCredit (E): EUR 8mn) and FY15/16 (UniCredit (E): EUR 14mn) despite the continued buyback of stores from franchisees (higher capex requirements, UniCredit (E): FY14/15 and FY15/16: EUR 16mn). In our view, the positive trend of 2Q14/15 and 3Q14/15 should continue in the last quarter of this year. However, we expect 4Q14/15 to be somewhat weaker than last year. We expect only small bolt-on acquisitions (for example, an increase of AAFFP’s stake in Optivisao Group from 25% to 30% in Portugal) and no dividend payments going forward.

DEBT RATIOS (UNICREDIT CALCULATION) DEBT MATURITY PROFILE (30 APRIL 2015)


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

2

4

6

8

10

12

14

FY10

/11

FY11

/12

FY12

/13

9M13

/14

FY13

/14

9M14

/15

FY14

/15E

FY15

/16E

adj. FFO/net debt (right axis) adj. net debt leverage (left axis)

0

100

200

300

400

500

600

700

9M14/15 2015 2016 2017 2018 >2018

Cash Undrawn, committed lines

Senior secured notes Senior notes

Convertible Financial debt

Senior secured notes

Senior notes

Convertible bonds

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Peer group Peer group comparison. Alain Afflelou is a mix of healthcare and retail (franchise).

Therefore, both have been included in this peer group comparison. 1. With a portfolio of 23 licensed brands, Marcolin is a leading designer, manufacturer and distributor of eyewear. The company has a global presence both in sunglasses and prescription frames. In December 2012, Marcolin was acquired by the private-equity firm PAI Partners. At the end of 2013, the company completed the acquisition of Viva Optique, a US-based wholesale designer and distributor of eyewear. 2. Luxottica is the global leader in the design, manufacture and distribution of premium luxury and sports eyewear. The company is a fully vertically integrated organization with activities ranging from design and R&D to the production and distribution of prescription frames and sunglasses around the world. In 2014, 42% of net sales stemmed from Manufacturing and Wholesale (23% operating income margin), and 58% from Retail (14.3% margin). The Wholesale network covers more than 130 countries over 50 commercial subsidiaries. Retail’s network includes more than 7,000 stores worldwide (among others, the prescription business via LensCrafters and sun and luxury eyewear via the Sunglass Hut). 3. Since being taken private in the financial year 2012/2013, Douglas has been transformed from a predominantly German diversified retail conglomerate into a leading pan-European selective beauty retailer. CVC Capital Partners acquired of perfume retailer Douglas from Advent International in June 2015 – the Kreke family is to remain a minority shareholder in Douglas.

PEER GROUP (ALAIN AFFLELOU)

Company Alain Afflelou Luxottica Marcolin Douglas Country France Italy Italy Germany Business activities Leading designer, manufacturer

and French optical retailer, with a network of more than 1,160 stores (majority franchised); product range: proprietary and exclusively licensed frames and sunglasses, own-brand lenses and third-party optical products and accessories

global leader in the design, manufacture and distribution of premium luxury and sports eyewear; Wholesale network covers >130 countries over 50 commercial subsidiaries; Retail network includes >7,000 stores worldwide

Leading designer, manufacturer and distributor of eyewear; wholesale 93%, retail 7%, prescription frames (51%), sunglasses (49%) Brand portfolio comprises >20 brands, two core brands, 50% of total revenues

Leading European beauty-products retailer; the company operates in 19 countries with over 1,700 stores (including franchisees)

Business risk profile Fair Strong Vulnerable Fair Financial risk profile Highly leveraged Modest Highly leveraged Highly leveraged Regional perspective (% of sales)

Network sales: France 74%, Spain 16%, Portugal 7%

US and Canada (56%), Europe (20%), Asia and Pacific (14)

Europe (36%), North America (39%), Asia (9%)

Germany (52%), 4% France, 23% South-western Europe

Rating (Moody’s/S&P/Fitch) (B2/B/--) (--/A-s/--) (B2/B-/--) Kirk Beauty Zero: (B1/B/--) Year 2014 2014 2013 2014 Sales Network sales: EUR 643mn

Revenue: EUR 324mn EUR 7.7bn FY13: EUR 212mn

FY14: EUR 362mn (Viva Optique acquired)

EUR 2,093mn

Change yoy Network sales: + 1.8% Revenue: - 0.7%

+4.6% Stable +5.7%

Adj. EBITDA EUR 76mn (UniCredit) EUR 1,562mn FY13: EUR 26.5mn (S&P) FY14: EUR 44mn

EUR 126.8mn (reported) EUR 199.5mn (adj. Douglas)

Adj. EBITDA margin 23.6% (UniCredit) 20.4% 10.4% (S&P) 9.5% (Douglas) Adj. net debt EUR 609mn EUR 2.1bn FY13: EUR 214mn (S&P) EUR 860mn (Douglas) Adj. FFO/net debt 8.7% 46.5% - S&P: FY14: 15-17% Adj. net debt/EBITDA 8.5x 1.4x FY13: 8.1x (S&P)

FYE 2014: 5.5-6.0x (S&P) FYE 2015: 5.5- 6.0x (S&P)

S&P: FY14: 4.0-4.5x (before transaction)

Owner structure (3 July 2015, Bloomberg)

Lion Capital (69.5%), Apax Partners (14.1%), Mr. Alain Afflelou (13.8%), management (2.6%)

DELFIN SARL 61.2%, ARMAIN Giorgio 1,91%, Blackrock 1.11%

December 2012: Marcolin was acquired by the private equity firm PAI Partners

CVC Capital Partners acquired Douglas from Advent International, with the Kreke family remaining a minority shareholder (15%) in Douglas

Source: S&P, Bloomberg, company information, UniCredit Research

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S&P’s matrix One of the key elements of S&P's approach to rating creditworthiness is its business-risk and financial-risk matrix. This matrix is used to match the companies in the consumer industry to the respective credit ratings and provides a good overview of the rating distribution in the sector.

S&P’S BUSINESS & FINANCIAL RISK MATRIX

Source: S&P, UniCredit Research

Stable outlook by all three rating agencies We expect no rating pressure

We anticipate no rating action or outlook revision in the short term. All three rating agencies confirmed their ratings and stable outlooks on the name in 2015.

■ Moody’s highlighted (9 July 2015) that its stable outlook includes that Alain Afflelou’s operating performance will not deteriorate within the coming quarters due to marketing initiatives and its presence in preferred networks. In its base-case scenario, Moody’s assumes that free cash flow generation will improve. Negative rating pressure could be exerted if adj. debt/EBITDA >7.0x (Moody’s calculation: LTM 9M14/15: 6.1x, FY13/14: 6.1x, 12-18 month forward view: 6.1x-6.4x).

■ S&P’s (15 June 2015) stable outlook reflects its view that the group will maintain positive free cash flow generation (EUR 35-EUR 45mn, co def. without net interest paid adjustment, FY13/14: EUR 52.3mn) and adequate liquidity in 2015. The leading position in France and Spain will enable the group to deliver annual growth of about 1-3% in 2015-2016, which is good in a challenging environment for branded consumer goods in Europe. S&P assumes that this growth will stem from the slow recovery of the Spanish markets and increased revenue in France from directly owned stores. The rating would be revised down if reported EBITDA <EUR 65mn (FY13/14: EUR 76.1mn) or adj. leverage were to deteriorate significantly (S&P’s calculation: FY13/14: 9.5x, FY14/15E: 9.5x-10.5x, FY15/16E: 10x-11x).

■ Fitch (8 Jan 2015) assumes, for its stable outlook: low-to-mid-single-digit sales growth driven by network expansion, EBITDA margin improvement and adequate liquidity. Fitch calculated FFO adj. leverage of 6.7x in FY13/14 and deleveraging to 6.0x in FY17/18, aided by the bullet debt maturity profile.

FinancialRisk

BusinessRisk

Minimal

FFO/ND: >60%ND/EBITDA: <1.5x

Modest

FFO/ND: 45%-60%ND/EBITDA: 1.5-2x

Intermediate

FFO/ND: 30%-45%ND/EBITDA: 2-3x

Significant


Aggressive


Highly Leveraged

FFO/ND: <12%ND/EBITDA: >5x

Excellent Wal-Mart, Johnson & Johnson, Pfizer

AAA/AA+

P&G, LVMH, Astra Zeneca, Novartis, Roche, Sanofi

AA

Glaxo SmithKline

A+/A BBB BBB-/BB+

Strong Henkel, Merck & Co, Nike, VF Group

AA/AA-

McDonald's, Compass, BSH, Luxottica, Philip Morris, Merck KGaA, Teva

A+/A

SCA, Deutsche Bahn, Carrefour, Auchan, Sodexo, Wesfarmers, Kering, BAT, Bayer

A-/BBB+

Casino, Tesco, Imperial Tobacco

BBB BB+ BB-

Satisfactory Ralph Lauren

A/A- BBB+

GTECH, Safeway, DIA

BBB/BBB-

Haniel, Metro, Lufthansa, Hornbach, Accor

BBB-/BB+ BB B+

FairBBB/BBB- BBB- BB+ BB

Ontex

BB-

Alain Afflelou

B

WeakBB+ BB+ BB

TUI, Safilo

BB-

Cirsa, ALBA Group, GamenetB+

Thomas CookZobele, SNAIB/B-

VulnerableBB- BB- B+ B

Marcolin

B-BB-/B+

A-

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Market perspective AAFFP 5.625%% 4/19

Cash universe Consumer HY B

On the Consumer HY B cash curve, the AAFFP 5.625% 4/19 is one of the issues providing the highest pick-up in Z-spread in combination with a lower duration and a higher yield-to-worst (YTW).

Z-SPREADS: AAFFP 5.625% 4/19 VERSUS CONSUMER HY UNIVERSE B


UniCredit HY B Consumer universe

UniCredit HY B universe: AAFFP provides an attractive YTW and Z-spread but has high adjusted net leverage.

UNICREDIT HY B UNIVERSE: AAFFP WITH ATTRACTIVE SPREAD AND YIELD VERSUS HIGH ADJ. LEVERAGE


AGROK 9.125% 2/20

ALLGRP 6.25% 12/21

BUTSAS 7.375% 9/19

CIRSA 5.875% 5/23

EUROCA 5.125% 7/21

EWOSAS 6.75% 11/20

FTEAU 9% 7/20

GALAPG 5.375% 6/21

HTZ 4.375% 1/19

HYDHLD 8% 4/19

ICECR 4.75% 5/20

IKKSFR 6.75% 7/21

IMOCAR 6.625% 7/19

LABERE 5.625% 3/21

MCLIM 8.5% 11/19

MDMFP 9% 8/20

NHHSM 6.875% 11/19

PICSUR 7.75% 2/20

SELNSW 6.5% 6/20

SMCPFP 8.875% 6/20

TANKRA 6.75% 12/20

TCGLN 7.75% 6/20

TCGLN 6.75% 6/21THOEUR 7.375% 7/19

UNIVEG 7.875% 11/20

WEPAHY 6.5% 5/20

ZOBELE 7.875% 2/18

AAFFP 5.625% 4/19

DOUGR 6.25% 7/22

200

250

300

350

400

450

500

550

600

650

700

0 1 2 3 4 5 6 7

Z-sp

read

in b

p

mDur

AGROK 9.125% 02/20

ZOBELE 7.875% 02/18

TCGLN 7.75% 06/20HTZ 4.375% 01/19

RHIGIM 7.25% 11/20

BORMIO 10% 08/18

FTEAU 9% 07/20

TCGLN 6.75% 06/21

CIRSA 5.875% 05/23

EUROCA 5.75% 06/22

EUROCA 5.125% 07/21

AAFFP 5.625% 04/19

200

300

400

500

600

700

800

900

1,000

3 4 5 6 7 8 9

Z-sp

reas

in b

p

adj. net debt / EBITDA (UniCredit)

AGROK 9.125% 02/20

ZOBELE 7.875% 02/18

TCGLN 7.75% 06/20HTZ 4.375% 01/19

RHIGIM 5.486% 12/19

RHIGIM 7.25% 11/20

BORMIO 10% 08/18

FTEAU 9% 07/20TCGLN 6.75% 06/21

CIRSA 5.875% 05/23

EUROCA 5.75% 06/22

EUROCA 5.125% 07/21

AAFFP 5.625% 04/19

3

4

5

6

7

8

9

3 4 5 6 7 8 9

Yiel

d to

Wor

kout

in %

adj. net debt / EBITDA (UniCredit)

<date>




Z-SPREADS VERSUS ADJ. LEVERAGE AAFFP VERSUS CONSUMER HY UNIVERSE B

Source: iBoxx, Bloomberg, S&P, UniCredit Research

SPREAD DEVELOPMENT AAFFP 5.625% 4/19 VERSUS SOME CONSUMER PEERS HY B


AGROK 9.125% 2/20ALBHSA 8.75% 11/19

AUTODI 6.5% 2/19

BORMIO 10% 8/18

CIRSA 5.875% 5/23

EDCON 9.5% 3/18

EDCON 9.5% 3/18

EUROCA 5.125% 7/21

FTEAU 9% 7/20

GAMENT 7.25% 8/18

ICECR 4.75% 5/20

LPLAYG 8.25% 2/21

MCLIM 8.5% 11/19MDMFP 9% 8/20

NHHSM 6.875% 11/19

RHIGIM 7.25% 11/20

SNAIM 7.625% 6/18

TCGLN 7.75% 6/20

TCGLN 6.75% 6/21

WEPAHY 6.5% 5/20

AAFFP 7.875% 4/19

AAFFP 5.625% 4/19

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0 2 4 6 8 10 12 14adj. net debt/EBITDA (S&P)

Z-sp

read

in b

p

300

400

500

600

700

800

900

Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

Z-sp

read

in b

p

AAFFP 5.625% 4/19

iBoxx EUR HY B

GALAP 5.375% 6/21 CIRSA 5.875% 5/23

DOUGR 6.25% 7/22

<date>




CASH PRICE AAFFP 5.6.25% 4/19 VERSUS CONSUMER HY B UNIVERSE


AAFFP 7.875% 4/19

SPREAD DEVELOPMENT AAFP 7.875% 4/19 VERSUS CONSUMER PEERS HY CCC


80

85

90

95

100

105

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15

CIRSA 5.875% 5/23 Galapagos 5.375% 6/21 Douglas 6.25% 7/22 AAFFP 5.625% 4/19

AAFFP 5.625% 4/19

GALAGOS 5.375% 6/21

500

700

900

1100

1300

1500

1700

1900

2100

Jul-14 Oct-14 Jan-15 Apr-15 Jul-15

Z-sp

read

in b

p

GALAPG 7% 6/22SNAIM 12% 12/18ZQK 8.875% 12/17AAFFP 7.875% 4/19EDCON 9.5% 3/18ZQK 8.875% 12/17

AAFFP 7.875% 4/19

<date>




SPREADS AAFP 7.875% 4/19 TO HY CONSUMER CCC UNIVERSE


CASH PRICE AAFP 7.875% 4/19 TO HY CONSUMER CCC UNIVERSE


GALAPG 7% 6/22

SNAIM 12% 12/18

TAKKO 9.875% 4/19

ZQK 8.875% 12/17

AAFFP 7.875% 4/19

EDCON 9.5% 3/18

HEMABV 8.5% 12/19

ZQK 8.875% 12/17

0

500

1000

1500

2000

2500

0 1 2 3 4 5 6

Z-sp

read

in b

p

mDur

35

45

55

65

75

85

95

105

115

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15

Takko AAFFP Snai Galapagos ZQk

AAFFP 7.875% 4/19

<date>




BOND DOCUMENTATION – AAFFP 5.625% 4/19 (SENIOR SECURED, EUR 365MN)

Issuer 3AB Optique Development S.A.S. Interest payment date Semiannually on 15 April and 15 October Call/put Make-whole clause @ Bund + 50bp until 10/15/15 Optional redemption From 15 October 2015 to 14 October 2016: 102.81250%

From 15 October 2016 to 14 October 2017: 101.40625% From 15 October 2017 and thereafter: 100% Optional redemption with equity proceeds: up to 40% at 105.625% until 15 October 2015

Change of control @ 101%, specific change-of-control event: consolidated leverage ratio of the parent < 5.50x prior to the eighteenth month of the issue date or <5.0x thereafter.

Guarantees Lion/Seneca France 1 S.A.S. (LSF1), Lion / Seneca France 2 S.A.S. and Alain Afflelou Franchiseur Security

Secured by first-ranking security, same security as RCF, including pledge over shares of Lion/Seneca France 2 S.A.S. and its subsidiaries: (i) pledges of all securities held in LSL2 (Lion/Seneca Lux 2) by LSL1 (Lion/Seneca Lux 1) (ii) pledges of the LSL2 PECs (iii) pledges of certain securities accounts relating to securities (including convertible bonds) held in the ManCos

(each of Tchin Management 1 and Tchin Management 2), the Parent, the Senior Notes Issuer and the Senior Secured Notes Issuer by LSL2 by LSL1, the ManCos, the Holding AA Entities, the Parent and the Senior Notes Issuer and shares held in Alain Afflelou Franchiseur and FP2A held by the Senior Secured Notes Issuer

(iv) pledges of certain bank accounts of LSL1, LSL2, the Parent, the Senior Notes Issuer and the Senior Secured Notes Issuer

(v) pledges of certain intercompany receivables of LSL1, LSL2, the Parent, the Senior Notes Issuer and the Senior Secured Notes Issuer and

(vi) call option agreements by the ManCos, the Holding AA Entities and certain warrant holders over securities of the Parent

Ranking First-ranking security, shared with super senior RCF (but second priority on enforcement proceeds) Certain covenants Limitation on debt

The Senior Secured Notes Issuer will not permit any of its Restricted Subsidiaries to incur any indebtedness. Exception fixed-charge coverage ratio would be at least 2.0 to 1.0 Most important carve-outs/exceptions: – Credit facility basket: >EUR 45mn and 60% of consolidated EBITDA – General basket: aggregate outstanding principal amount, which when taken together, will not exceed EUR 30mn

and 3% of total assets – Capital Lease Obligations basket: >EUR 15mn and 1.5% of total assets

Limitation on sale of certain assets -Customary 75% of cash/cash equivalents requirement for asset sales, with a designated non-cash consideration of EUR >10mn and 1% of total assets eroding such requirement. -Asset sale proceeds can be used to make a notes offer; repay credit facility debt (with commitment cancellation for revolving facilities) secured on the Collateral; repay debt secured on non-collateral assets (with commitment cancellation for revolving facilities under Credit Facilities); or repay pari passu debt secured on the collateral subject to a pro-rata notes offer. -Reinvestment requirements are strong, by not allowing reinvestment in short-term assets.

Limitation on restricted payments

The Senior Secured Notes Issuer will not, and will not permit any of its Restricted Subsidiaries, directly or indirectly, to:

- declare or pay a dividend or make any other payment or distribution on or in respect of the Senior Secured Notes Issuer’s or any Restricted Subsidiary’s Capital Stock (including any payment in connection with any merger or consolidation involving the Senior Secured Notes Issuer or any of its Restricted Subsidiaries):

Most important carve-outs/exceptions: - Management stock buyback does not exceed EUR 7.5mn, plus (1) EUR 2mn multiplied by the number of

fiscal years that have commenced since the Issue Date, plus (2) Net Cash Proceeds received by the Senior Secured Notes Issuer or its Restricted Subsidiaries since the Issue Date, or as a contribution to the equity of the Issuer from the sale of stock to management investors

- Public offering of such common stock or common equity interests, in an amount not to exceed in any fiscal year the greater of 6% of the Net Cash Proceeds received by the Senior Secured Notes Issuer from such Public Offering

- 5% of the IPO market capitalization; provided that after giving pro forma effect to such loans, advances, dividends or distributions, the Consolidated Leverage Ratio shall be equal to or less than 3.50 to 1.00;

Cross default Yes, with any default in the restricted group of indebtedness for more than EUR 20mn

Incurrence covenants Yes, fixed-charge cover test of >= 2.0x and for dividend payments an additional test on leverage, which has to be below 3.5x

Maintenance covenant No

Negative pledge Yes

Source: company data, UniCredit Research

<date>




BOND DOCUMENTATION – AAFFP 7.875% 4/19 (SENIOR UNSECURED, EUR 75MN)

Issuer Lion Seneca France 2 S.A.S Interest payment date Semiannually on 15 April and 15 October Call/put Make-whole clause Make-whole @ Bund + 50bp until 10/15/15 Optional redemption From 15 October 2015 to 14 October 2016: 103.9375%

From 15 October 2016 to 14 October 2017: 101.968875% From 15 October 2017 and thereafter: 100% Optional redemption with equity proceeds: up to 40% at 107.875% until 15 October 2015

Change of control @ 101%, specific change-of-control event: consolidated leverage ratio of the parent <5.50x prior to the eighteenth month of the issue date or <5.0x thereafter.

Guarantees On a subordinated basis by Lion/Seneca France 1 (LSF1) Security Will be secured by second-ranking security interests pursuant to the Intercreditor Agreement over

(i) pledges of all securities held in LSL2, the Parent and the Senior Notes Issuer (ii) pledges of the LSL2 PECs (iii) pledges of certain securities accounts relating to securities held in the ManCos and the Parent (iv) pledges of certain bank accounts of LSL1, LSL2, the Parent and the Senior Notes Issuer (v) pledges of certain intercompany receivables of LSL1, LSL2, the Parent and the Senior Notes Issuer (vi) call option agreements by the ManCos, the Holding AA Entities and certain warrant holders over securities of

the Parent, and (vii) pledges of receivables under a master intercompany loan agreement between the Parent and the Senior Notes

Issuer (the “Senior Notes Collateral”), each on a second-ranking basis

Ranking Secured by second-ranking security interests Certain covenants Limitation on debt The Senior Secured Notes Issuer will not permit any of its Restricted Subsidiaries to incur any indebtedness.

Exception fixed-charge coverage ratio would be at least 2.0 to 1.0x Most important carve-outs/exceptions: – Credit facility basket: >EUR 45mn and 60% of consolidated EBITDA – General basket: aggregate outstanding principal amount, which when taken together, will not exceed EUR 30mn

and 3% of total assets Capital Lease Obligations basket: >EUR 15mn and 1.5% of total assets

Limitation on sale of certain assets -Customary 75% of cash/cash equivalents requirement for asset sales, with a designated non-cash consideration of EUR >50mn and 2.5% of total assets eroding such requirement. -Asset sale proceeds can be used to make a notes offer; repay credit facility debt (with commitment cancellation for revolving facilities) secured on the Collateral; repay debt secured on non-collateral assets (with commitment cancellation for revolving facilities under Credit Facilities); or repay pari passu debt secured on the collateral subject to a pro rata notes offer. -Reinvestment requirements are strong, by not allowing reinvestment in short-term assets. -Asset sales definition carve-outs include a de minimis of EUR 20mn and permitted restricted payments and permitted investments

Limitation on restricted payments It is not permitted, directly or indirectly, to: –declare or pay a dividend or make any other payment or distribution on or in respect of the Senior Secured Notes Issuer’s or any Restricted Subsidiary’s Capital Stock (including any payment in connection with any merger or consolidation involving the Senior Secured Notes Issuer or any of its Restricted Subsidiaries): Most important carve-outs/exceptions: –Management stock buyback does not exceed EUR 7.5mn, plus EUR 2mn multiplied by the number of fiscal years that have commenced since the Issue Date, plus Net Cash Proceeds received by the Senior Secured Notes Issuer or its Restricted Subsidiaries since the Issue Date, or as a contribution to the equity of the Issuer from the sale of stock to management investors –Public offering of such common stock or common equity interests, in an amount not to exceed, in any fiscal year, the greater of 6% of the Net Cash Proceeds received by the Senior Secured Notes Issuer from such Public Offering –5% of the IPO Market Capitalization; provided that after giving pro forma effect to such loans, advances, dividends or distributions, the Consolidated Leverage Ratio shall be equal to or less than 3.50 to 1.00;

Cross default On a subordinated basis by Lion/Seneca France 1 Incurrence covenant Yes, fixed-charge cover test of >= 2.0x and for dividend payments an additional test on leverage, which has to be

below 3.5x Negative pledge Yes


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CORPORATE STRUCTURE


Apax France and minority co-investors

Lion Capital and minority co-investors

Lion Seneca Lux Topco

Lion Seneca Lux 1 LSL 1

Lion Seneca Lux 2 LSL 2

Lion Seneca France 1

(the “Parent”)

Lion Seneca France 2

(the “Senior Notes Issuer”)

3AB Optique Developpement

(the “Senior Secured Notes Issuer”)

3AB Optique Expansion

Management

Tchin Management 1

Tchin Management 2

Holding AA &Fils

Holding AA-OC

Mr. Alain Afflelou

FP2A Alain Afflelou Franchiseur

Alain Afflelou International

Alain Afflelou Espana

F2L

Alain Afflelou Belgique Alain Afflelou Portugal Alain Afflelou Optico

16.86% 83.14%

EUR 75mn Senior Notes

offered hereby

EUR 365mn Senior

Secured Notes offered

hereby

EUR 30mn Revolving Credit Facility Senior Secured Notes restricted group

Convertible Bonds

2.29% 0.31% 13.78% 83.62%

Master loan

Senior Notes restricted group

Fundacion Alain Afflelou

Convertible bonds

3ABOD Intra-Group Loan

Master loan

LSL2 PECs

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Alain Afflelou Analyst: Dr. Silke Stegemann, CEFA (UniCredit Bank), +49 89 378-18202 Corporate Ratings Rating Outlook Credit Profile Trend Recommendation Index Mcap B3/B/B (Lion / Seneca France 2 SAS)

STABLE/STABLE/STABLE- Slight improvement in FY15/16 Buy iBoxx HY Not listed

Company Description: Alain Afflelou, headquartered in Paris, France, was founded in 1972. With a network of 1,174 stores as of 31 July 2014, including 997 (85%) franchised stores and 177 (15%) directly owned stores, across eleven countries, primarily in France, Spain and adjacent countries, Alain Afflelou sells frames, corrective lenses, sunglasses and related products. It is the largest optical franchisor and the third largest optical banner (ALAIN AFFLELOU and CLARO) in terms of network sales in France. The company is also the second largest optical retail chain in terms of network sales in Spain. In 2012, it launched the ALAIN AFFLELOU ACOUSTICIA banner and network, replicating the franchise model to the hearing aid market. As of 31 July 2014, the company had 1,168 full-time employees, 54% of which were based in France and 44% in Spain. The majority of its employees work in its directly owned stores. Lion Capital (69.5%) and Apax France (14.1%) acquired the group in 2012. Besides management (2.6%), Mr. Alain Allfelou retained 13.8%. Lion/Seneca France 2 SA, is the parent of Alain Afflelou

Moody's (07/15): The B3 rating reflects 1. high leverage, with adj. debt/EBITDA of 6.1x at LTM 9M14/15; 2. a modest revenue base, with low diversification; 3. focus primarily on only one segment (optical retail); 4. presence in a very competitive and fragmented market; 5. declining like-for-like sales, which should be offset through new store openings. The rating also reflects 1. a significant presence in the resilient French optical retail market, with favorable regulatory arrangements, and 2. strong brand recognition through advertising, which is centered on the founder. The rating would be revised downwards if free cash flow turned negative, adj. debt/EBITDA shifted to 7.0x and/or concern about liquidity were to arise. S&P (06/15): The rating reflects the small size, limited diversification outside France, its No. 3 market position in France’s (Spain No. 2) optical retail market, strong brand recognition and the stability of the franchisor model. A high adj. net debt/EBITDA ratio (including convertible bonds and preferred equity certificate) of 9-10x (S&P: FY14: 9.5x, 2015E: 9.5-10.5x, 2016E: 10-11x). No refinancing risk in the short term. Modest but positive free-cash-flow generation. An FFO interest coverage ratio of about 3x for 2015 and 2016.

GROUP REVENUE BREAKDOWN (FY13/14

GROUP GROSS PROFIT BREAKDOWN (FY13/14)

Strengths/Opportunities - Good market positions, especially in France (No. 3 optical retailer, largest

franchisor) and Spain (No. 2) - Solid track record in new-product development; high brand awareness,

especially in France (99%), Spain (87%), Belgium (89%), Switzerland (80%)

- Resilient and noncyclical business thanks to the ageing population’s growing need for eye-care treatments; receives support from the French healthcare system with highest optical spending and shortest renewal cycle

- Low cost structure due to the franchisor business, with major costs supported by franchises and suppliers

- No refinancing risk in the short term; modest but positive free-cash-flow generation; above-average sales per store and stable profitability over the past five years (adj. EBITDA: EUR 60.5mn in FY08/09, EUR 76.6 in FY13/14)

- Quick strategy adaption to closed networks; over 200 Afflelou franchises have successfully responded to tenders (Santeclair, Itelis in 2014, 16mn people in FY14) to increase customer base and network sales; launch of its online platform (March 2014)

Weaknesses/Threats - Limited geographic diversification and focus primarily on one segment

(optical retail), France (80%) and Spain represent around 94% if its network sales, Alain Afflelou has a modest revenue base (EUR 324mn in FY13/14)

- Risks related to the reimbursement by the healthcare system (any decrease in the level of reimbursement for optical expenses from OCAM would negatively impact spending power); in Spain (15% of network sales), optical products are not reimbursed

- High leverage

- High marketing and advertising expenditure above that of competitors Optic 2000 and Krys; key marketing strategy is focused on its founder, Mr. Alain Afflelou, which includes risks associated with his leaving the company

- High competitive environment and strong dependence on Chinese intermediary agent that supplies frames and sunglasses

MAJOR BOND ISSUES

ISIN Ticker/Issue Issue Rating Amount (EUR mn) Comment XS1028956909 AAFFP 5.625% 15/04/19 B2/B/BB- 365 Change of control, limitation of indebtedness, limitation of

restricted payments, limit on asset sales, limitation on lines, merger and consolidation

XS1028956818 AAFFP 7,625% 15/04/19 Caa2/CCC+/CCC+ 75 Change of control, limitation of indebtedness, limit on asset sales, certain sales of assets, merger restrictions, limitations on subsidiary debt

Source: rating agencies, company data, iBoxx, UniCredit Research

Directly owned31.0%

Adjusted franchisor revenue69.0%

Directly owned38.0%

Franchisor62.0%

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PROFIT AND LOSS (ALAIN AFFLELOU, UNICREDIT CALCULATION)

EUR mn 2010/11 2011/12 2012/13 9M13/14 2013/14 9M14/15 2014/15E 2015/16E Revenues 192 286 330 235 324 231 321 330 Total network sales 661 663 648 476 351 474 648 655 EBITDA reported (Alain Afflelou) 66 76 71 54 76 49 72 75 EBIT 62 51 39 41 55 37 52 58 Net income 11 -7 -25 -13 -40 -12 -15 -5

PROFITABILITY RATIOS

EBITDA margin (reported) 34.5% 26.6% 21.5% 22.8% 23.5% 21.1% 22.4% 22.8% EBIT margin (reported) 32.4% 17.8% 11.9% 17.5% 16.8% 16.0% 16.2% 17.7%

CASH FLOW

EUR mn 2010/11 2011/12 2012/13 9M13/14 2013/14 9M14/15 2014/15E 2015/16E EBITDA clean 66 76 71 54 76 49 72 75 Adjustments/restructuring 51 52 -18 0 -3 -5 -9 2 Interest -52 -61 -27 -19 -27 -25 -28 -30 Tax -2 -3 0 -3 -2 -3 -2 -2 FFO (funds from operations, UniCredit) 64 64 26 31 44 15 33 46 Change in working capital 6 3 -5 -20 -18 -10 -14 -16 Operating cash flow 55 57 21 11 26 6 19 30 Capex -1 -11 -13 -9 -13 -15 -16 -16 Free operating cash flow 54 45 8 2 13 -9 3 14 Dividends 0 0 0 0 0 0 0 0 Acquisitions/disposals 2 -29 -506 1 1 5 5 0 FCF (UniCredit calculation) 56 17 -498 2 14 -4 8 14

CAPITALIZATION

EUR mn 2010/11 2011/12 2012/13 9M13/14 2013/14 9M14/15 2014/15E 2015/16E Equity 70 166 165 152 125 113 148 165 Senior secured bank debt/bonds 261 241 407 414 359 356 340 340 Unsecured debt 37 6 84 82 82 82 Total debt (UniCredit) 547 438 568 597 632 652 625 617 PiK loans/Convertible bonds 249 191 162 182 189 214 220 214 Cash 89 23 12 9 23 15 23 23 Net debt (total debt minus cash, incl. convertible, UniCredit)

458 415 557 588 609 637 602 594

Net debt (def. Alain Afflelou) n.a. n.a. 422.2 427.9 428.4 431.0 434.0 404.0

LEVERAGE RATIOS

Senior secured debt leverage (UniCredit) 3.9x 3.2x 5.7x 5.3x 4.7x 5.0x 4.7x 4.5x Net debt leverage (unadjusted, UniCredit) 6.9x 5.5x 7.8x 7.5x 8.0x 9.0x 8.4x 7.8x Total debt leverage (unadjusted, UniCredit) 12.0x 8.3x 10.3x 9.9x 10.8x 12.2x 11.7x 10.9x

LEVERAGE RATIOS

EUR mn 2010/11 2011/12 2012/13 9M13/14 2013/14 9M14/15 2014/15E 2015/16E For pensions 1 1 1 1 1 1 1 1 For operating leases 30 30 30 30 39 39 39 39 Others 23 23 23 23 22 22 22 22 Total adjusted net debt leverage (UniCredit) 7.9x 7.5x 12.6x 11.2x 8.6x 9.7x 9.3x 8.3x Total adjusted FFO/net debt (UniCredit) 15.0% 16.4% 6.3% 9.2% 8.7% 6.2% 7.1% 9.2%




UniCredit Research page 24

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UniCredit Research* Erik F. Nielsen Group Chief Economist Global Head of CIB Research +44 207 826-1765 [email protected]

Dr. Ingo Heimig Head of Research Operations +49 89 378-13952 [email protected]

Credit Research

Luis Maglanoc, CFA, Head +49 89 378-12708 [email protected]

Credit Strategy & Structured Credit Research

Dr. Philip Gisdakis, Head Credit Strategy +49 89 378-13228 [email protected]

Dr. Christian Weber, CFA, Deputy Head Credit Strategy +49 89 378-12250 [email protected]

Dr. Tim Brunne Quantitative Credit Strategy +49 89 378-13521 [email protected]

Holger Kapitza Credit Strategy & Structured Credit +49 89 378-28745 [email protected]

Dr. Stefan Kolek EEMEA Corporate Credits & Strategy +49 89 378-12495 [email protected]

Manuel Trojovsky Credit Strategy & Structured Credit +49 89 378-14145 [email protected]

Financials Credit Research

Franz Rudolf, CEFA, Head Covered Bonds +49 89 378-12449 [email protected]

Dr. Tilo Höpker Banks +49 89 378-12960 [email protected]

Luis Maglanoc, CFA Regulatory & Accounting Service +49 89 378-12708 [email protected]

Natalie Tehrani Monfared Regulatory & Accounting Service +49 89 378-12242 [email protected]

Emanuel Teuber Covered Bonds +49 89 378-12961 [email protected]

Robert Vielhaber Sub-Sovereigns & Agencies, Green Bonds +49 89 378-12004 [email protected]

Dr. Martina von Terzi Banks, Financial Services, Insurance +49 89 378-14245 [email protected]

Dr. Claudia Vortmüller Banks +49 89 378-12429 [email protected]

Corporate Credit Research

Stephan Haber, CFA, Co-Head Telecoms, Technology +49 89 378-15192 [email protected]

Dr. Sven Kreitmair, CFA, Co-Head Automotive & Mobility +49 89 378-13246 [email protected]

Christian Aust, CFA Industrials +49 89 378-12806 [email protected]

David Bertholdt Capital Goods & Services +49 89 378-13211 [email protected]

Mehmet Dere Retail, Travel & Leisure, Oil & Gas +49 89 378-11294 [email protected]

Michael Gerstner Utilities, Hybrids +49 89 378-15449 [email protected]

Alexander Rozhetskin Russia/CIS (Banks, Oil & Gas, Basic Resources, Telecoms) +44 207 826-7953 [email protected]

Jonathan Schroer, CFA Media/Cable, Logistics, Business Services +49 89 378-13212 [email protected]

Dr. Silke Stegemann, CEFA Health Care & Pharma, Food & Beverage, Personal & Household Goods +49 89 378-18202 [email protected]

Publication Address

UniCredit Research Corporate & Investment Banking UniCredit Bank AG Arabellastrasse 12 D-81925 Munich [email protected]

Bloomberg UCCR Internet www.research.unicredit.eu

*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit Bank AG London Branch (UniCredit Bank London), UniCredit Bank AG Milan Branch (UniCredit Bank Milan), UniCredit Bank New York (UniCredit Bank NY), UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic and Slovakia, Bank Pekao, ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Tiriac Bank (UniCredit Tiriac). CR 18

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