Credit Ratings

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

Berkshire Hathaway (BRK-A) Cut to 'AA' From 'AA+' by S&P May 16, 2013 08:26AM

(Updated - May 16, 2013 8:26 AM EDT)

Standard & Poor's Ratings Services said today that it has lowered its counterparty credit rating on Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B)( AA/Negative/A-1+) by one notch to 'AA' from 'AA+' and affirmed its 'AA+' insurance financial strength ratings on BRK's core subsidiaries following release of our revised Insurers Rating and Group Rating Methodology, released on May 7, 2013. The outlook on all ratings is negative. At the same time, we assigned our 'AA' senior debt rating to Berkshire Hathaway Finance Corp.'s (BHFC) $1.0 billion senior unsecured notes. BHFC has issued the notes in two tranches: $500 million 1.3% senior unsecured notes due May 15, 2018, and $500 million 4.3% senior unsecured notes due May 15, 2043. The company used the proceeds of this issue to repay $1.0 billion of senior notes maturing on May 15, 2013.

BRK fully guarantees BHFC's new note issuance. BHFC's borrowings are used to fund the finance operations of Vanderbilt Mortgage & Finance Inc., a wholly owned subsidiary of Clayton Homes Inc., a vertically integrated manufactured housing company. We treat these borrowings as operating leverage, so we exclude the debt, interest expense, and pretax operating income of these operations from our calculations of financial leverage and coverage for BRK.

"The lower credit rating on BRK better reflects our view of BRK's dependence on its core insurance operations for most of its dividend income," said Standard & Poor's credit analyst John Iten. Its non-insurance business segments generate a majority of BRK's operating income, but aside from the insurance subsidiaries only Burlington Northern Santa Fe LLC (BNSF) has provided a significant portion of the total dividends paid from the operating companies to the holding company. BRK's adjusted leverage and coverage metrics are more consistent with those of 'AA' rated issuers rated under our comparable corporate criteria.

The ratings reflect our view of BRK's excellent business risk profile (BRP) and very strong financial risk profile, built on an extremely strong competitive position and very strong capital and earnings. These factors are offset to some extent by BRK's high tolerance for equity investments, which has resulted in volatility in the company's insurance subsidiaries' statutory capital, capital adequacy of the insurance operations being less than what we typically expect for the rating category, and adequate enterprise risk management. Management succession at BRK is also an offsetting factor. We assess a one-notch uplift to the BRP to reflect our view of the low-risk nature of its non-insurance operations, which comprise approximately 60% to 70% of total earnings. In addition, we apply a holistic adjustment because BRK, on a consolidated basis, continues to outperform its insurance and non-insurance peers with respect to operating and financial performance, such as underwriting and cash-flow generation. For first-quarter 2013, pretax operating income was $5.9 billion, up 36% from the same quarter in 2012, with most of the improvement stemming from the insurance segment of BRK. Shareholders' equity rose to $198.1 million from $187.6 million as of year-end 2012, mostly driven by $5 billion of net income in the quarter and the appreciation of unaffiliated equity securities.

The outlook is negative for two reasons. One is the sovereign rating cap of 'AA+/Negative', which applies to the obligations of the U.S. government, government-related enterprises, and U.S. financial services firms. The second reason is that we could lower the rating if the capital adequacy according to our capital model of BRK's insurance operations relative to its risk profile deteriorates as a result of a material increase in investment risk exposure or the funding of a large acquisition by the insurance companies. The negative outlook reflects our sovereign rating cap and our view on the group's capital adequacy per our proprietary capital model. We also expect the group to maintain operating performance consistent with our base-case scenario, and at least a very strong competitive position.