Credit Ratings

S&P Lowers Outlook on Thomson Reuters (TRI) to Negative; Affirms Ratings May 22, 2013 10:15AM

Standard & Poor's Ratings Services revised its outlook on New York-based information solutions provider Thomson Reuters Corp. (NYSE: TRI) to negative from stable. At the same time, Standard & Poor's affirmed its ratings on the company, including its 'A-' long-term corporate credit rating.

"We base the outlook revision on our view of the weaker-than-expected operating performance in the company's Financial & Risk segment, which we expect will continue this year," said Standard & Poor's credit analyst Lori Harris.

The company is a major global integrated information solutions provider, operating under four segments: Financial & Risk (F&R), Legal, Tax & Accounting, and Intellectual Property & Science.

The financial industry has undergone a dramatic change in market dynamics given the downturn in the global financial markets in the last recession, with Standard & Poor's believing that financial institutions will continue to downsize. The effect at Thomson Reuters, through its F&R segment, was more modest during the recession owing to the company's high percent of recurring subscription revenues and business diversification, and the fact that the largest customer accounts for only about 1% of total consolidated revenue. However, the F&R business has yet to return to healthy organic revenue growth as we expected.

The negative outlook reflects Standard & Poor's view of the weaker-than-expected operating performance within the F&R segment and hurdles Thomson Reuters faces in returning this business to healthy and sustainable revenue growth given the slow economic recovery and intensely competitive operating conditions. A downgrade could result from further execution issues in the F&R segment; weak revenue and EBITDA growth trends for the company as a whole or specifically in F&R; or adjusted debt to EBITDA at or above 2.5x on a consistent basis. Alternatively, we could revise the outlook to stable if Thomson Reuters demonstrates sustainable improvement in F&R's operating performance, as well as its other business segments, while maintaining adjusted debt to EBITDA below 2.5x.

S&P Revises Whole Foods (WFM) Outlook to Positive; Affirms 'BBB-' Rating May 21, 2013 04:34PM

Standard & Poor's Ratings Services said today it revised its rating outlook on the Austin-based Whole Foods Market Inc. (Nasdaq: WFM) to positive from stable and affirmed the 'BBB-' corporate credit rating.

The outlook revision comes as the company continues to perform well, driven by strong sales growth from new stores and solid same-store sales increases. Furthermore, the company enhanced operating margins mainly as a result of operating efficiencies from the higher sales volumes. We expect the strong trends to continue at least over the near term. The company has no funded debt, and Whole Foods Markets' adjusted debt consists of our operating lease adjustment. We expect that adjustment to grow at the rate comparable to square footage growth, but also believe that the company will likely grow profits at a faster rate, thereby enhancing credit metrics.

"Standard & Poor's Ratings Services' rating on Whole Foods Market Inc. reflects our "fair" assessment of its business risk profile, which incorporates the company's strong position as the leader in the organic and natural food retailing sector, and our expectation that the company will continue to outperform traditional grocery stores in the next two years," said credit analyst Charles Pinson-Rose. "We also view Whole Foods' financial risk as "intermediate". We based this on the company's strong cash flow generation and our forecast credit ratios."

Our rating outlook is positive. This incorporates our expectations that the overall profit growth should outpace the growth in operating lease adjusted debt. If the company performs better than we anticipate, we would consider a higher rating. For example, if debt-to-EBITDA was in the low-2x area and FFO-to-debt was in the 30% area, we may consider a higher rating. We estimate this could occur in 2013 if EBITDA grew around 27% to 29% and would track toward $1.4 billion, while operating lease commitments only grew by 7% to 8%. We believe this level of EBITDA growth is unlikely in 2013, but if the company continues its current performance trajectory, we expect the company could reach those profitability levels and credit metrics in 2014.

We would likely revise our outlook to stable if the company's profitability growth trends moderated to the high-single-digit area. At that point, profits would only increase in line with our expected growth in operating lease adjustment to debt. We would expect that this would mostly likely be a result of comparable-store sales slowing to the low-single-digit area and the company maintaining operating margins.

Moody's Sees No Impact on JCPenney (JCP) Rating from $500M Term Loan Increase May 21, 2013 12:19PM

Moody's Investor's Service today stated that J.C. Penney Company, Inc.'s (NYSE: JCP) Caa1 Corporate Family Rating and negative outlook are not currently impacted by the increase to $2.25 billion from its previously announced $1.75 billion senior secured term loan due 2020. In addition, the increase will not change the B2 rating on the $2.25 billion term loan, the Caa2 senior unsecured notes rating, nor the SGL-3 Speculative Grade Liquidity rating.

The larger size of the term loan will further bolster JCP's liquidity. Thus, it provides JCP with additional financial flexibility to address its operating performance weakness. However, the ratings are not currently impacted as JCP's credit metrics and operating performance remain very fragile. Although first quarter operating results largely met Moody's expectations, operating performance was very weak. In addition, Moody's forecasts that JCP will continue to experience a sizable cash flow burn in the second and third quarters of 2013. JCP generated about $960 million in negative cash flow in the first quarter. Moody's estimates that JCP will likely burn an additional $1.4 billion of cash flow in the second and third quarters of 2013 before turning free cash flow positive in the fourth quarter.

S&P Lowers JCPenney (JCP) Unit Term Loan From 'B' to 'B-'; Outlook Negative May 21, 2013 10:30AM

On May 21, 2013, Standard & Poor's Ratings Services lowered its rating on J.C. Penney Corp. Inc.'s (a subsidiary of J.C. Penney Co. Inc. (NYSE: JCP)) senior secured term loan to 'B-' from 'B' and revised the recovery rating to '2' from '1'. The '2' recovery rating indicates our expectation for a substantial recovery (albeit at the high end of the 70%-90% range) in the event of a payment default.

The lower ratings reflect a decline in recovery estimates for term loan lenders because of the upsizing. The company plans to use the proceeds from the term loan to fund operating needs, working capital requirements, and the tender for its debentures due 2023.

At the same time, we affirmed all other ratings on the company, including the 'CCC+' corporate credit rating. The outlook is negative.

Rationale

The rating on Penney reflects Standard & Poor's assessment that the company's business risk profile is "vulnerable" and its financial risk profile is "highly leveraged." Our business risk assessment incorporates our analysis that the department store industry is highly competitive, with large, well-established participants. Based on this environment, we believe further performance difficulties may cause the company to lose market share to other players, such as Macy's, Kohl's Corp., Sears, other department stores, or off-price retailers. We believe there could be further meaningful changes over the next few months as the new CEO reassesses the "shops," promotional, and marketing strategies that contributed to Penney's poor performance over the past year. In our opinion, the company will implement these changes over the next few months, but its ability to stabilize operations remains highly uncertain.

We assess management as "weak," under our criteria. We view the frequent shifts in pricing, promotion, and marketing plans over the past year as indicative of a strategy that has confused and alienated the core consumer. The board enabled the prior CEO to implement a highly risky strategy without undergoing any testing to see the effects on the customer. This had devastating consequences for performance over the past year. In addition, the frequent and significant changes in management over the past year underscore our view of weak corporate governance by the board. In our opinion, we now believe the new CEO's involvement is instrumental to a potential turnaround, and his absence would be viewed negatively.

Performance remained extremely weak in recent quarters, as traffic was severely hurt by the new strategy. Additionally, we believe that a few shifts in pricing, promotion, and marketing strategies during the past year resulted in customer confusion, which also impaired performance. As a result, sales continued to decline with comparable-store sales falling 16.6% in the first quarter ended May 4, 2013, following a same-store sales decline of 25.2% last year. Margins eroded significantly due to increased clearance and negative sales leveraging, resulting in negative EBITDA. Over the next 12 months, we expect Penney to experience further operational disruptions as it refines its strategy. We believe that customer traffic is likely to remain negative, thus resulting in weaker revenue performance. Our assumptions for the company for 2013 include:

• Sales per square foot to decline in the mid- to high-single-digit area;
• EBITDA margins to increase to the 2% area due to fewer markdowns and benefits from cost reductions;
  
• Capital expenditures to be around $900 million; and
  
• Free operating cash flow to be substantially negative, in the negative $1.5 billion range.

We assess Penney's financial risk profile as "highly leveraged," as our view of liquidity remains "less than adequate" and credit protection measures have deteriorated over the past year because of performance declines. Given our forecast for some EBITDA recovery over the next 12 months and the substantial increase in funded debt since year end, credit protection measures are largely meaningless. We expect leverage to be more than 30x, interest coverage to be substantially less than 1.0x, and funds from operations (FFO)-to-total debt to be less than 5% over the next 12 months.

Liquidity

We assess Penney's liquidity as "less than adequate," with meaningful cash uses over the next year. Since its fiscal year-end, the company has drawn $850 million under its $1.85 billion asset-based revolving credit facility and will be issuing a $2.25 billion term loan. We believe the these two fundraising activities (in conjunction with cash on hand of $930 million at Feb. 2, 2013) will be sufficient to cover cash needs over the next year, which we estimate to be around $700 million for working capital, $900 million for capital expenditures, and around $255 million for the debt tender principal. However, we do not believe that the company will generate sufficient operating cash flow to cover its working capital and capital expenditure needs over the next year, especially given the additional interest expense on the new term loan.

We forecast that the company's free operating cash flow will be about negative $1.5 billion for 2013. Other factors and views contributing to our liquidity assessment include the following:

• We estimate liquidity sources to cover uses by more than 1.2x;
  
• We expect that net liquidity sources would be positive even with a 15% decline in EBITDA;
  
• We believe that the company has well-established and solid relationships with its banks; and
  
• Penney has manageable debt maturities over the next two to three years.

Recovery analysis

An updated recovery analysis report will be published shortly after this release on RatingsDirect.

Outlook

The negative outlook reflects our view that further operational issues are likely over the next year as the company refines its "shops", marketing, and promotional strategies and that success remains uncertain. Although we believe the company has alleviated some of the very near term concerns with the recent draw down and term loan issuance, we do not believe that the company will generate sufficient operating cash flows to cover working capital and capital expenditures. Although we expect some recovery of EBITDA over the next 12 months, we do not believe credit protection measures will be meaningful with coverage substantially below 1.0x.

We could consider lowering our rating if performance weakened further such that we believed the company would likely default within the next 12 months. In such a scenario, the company is unable to stabilize operations, leading to a cash burn that is meaningfully higher than our forecast. Under this scenario, vendors would tighten turns leading to a substantial decline in cash on hand.

Although we consider the possibility for an upgrade to be remote, key positives would include performance recovery much earlier than we currently expect as the company implements its revised strategy. Another important component would be sufficient cash flow from operations that cover ongoing working capital needs and capital expenditures. Any consideration for an upgrade would require sustained leverage below 7.0x and interest coverage above 1.5x.

Slovenia IDR cut from A- to BBB+ at Fitch, Outlook Negative May 17, 2013 12:30PM

Slovenia IDR cut from A- to BBB+ at Fitch, Outlook Negative