S&P Keeps Family Dollar Stores (FDO) Ratings on CreditWatch Negative Pending Dollar Tree (DLTR) Deal

Standard & Poor's Ratings Services today said its 'BBB-' corporate credit and issue-level ratings on Family Dollar Stores Inc. (NYSE: FDO) remain on CreditWatch with negative implications, where we placed them on July 28, 2014. Today's update follows shareholder approval of the proposed merger with Dollar Tree Inc. and accompanying announced financing to fund the deal.

"The ratings on Family Dollar reflect the pending merger with Dollar Tree Inc. (Nasdaq: DLTR), following a drawn out bidding war with Dollar General Corp. (BBB-/Watch Neg/--) for the company given recent underperformance and increased competition in the saturated discount sector," said credit analyst Diya Iyer.

We will continue to closely monitor the timing and capital structure of the Dollar Tree merger in the coming month, including the progress of approval from the Federal Trade Commission. We intend to downgrade Family Dollar and its notes at the close of the transaction.

Should the transaction not close as expected, we will reevaluate the ratings and capital structure in light of standalone Family Dollar's recent weaker-than-anticipated performance, which could still push the company's corporate credit and issue-level ratings to speculative-grade and into the 'BB' category, given an increase in leverage to 3.1x for the year through Nov. 29, 2014, from 2.4x last year, with interest coverage falling to 5.4x from 7.2x over the same time frame.

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