Family Dollar (FDO) Placed on CreditWatch Negative by S&P (DLTR)

Standard & Poor’s Ratings Services today placed all its ratings on Family Dollar Stores Inc. (NYSE: FDO), including the ‘BBB-’ corporate credit rating and ‘BBB-’issue-level rating on the company’s senior unsecured notes, on CreditWatch with negative implications.

The CreditWatch placements come after Dollar Tree Inc. (Nasdaq: DLTR) agreed to purchase Family Dollar Stores Inc., a large part of which will be funded with debt and thereforeweaken credit ratios materially. Assuming Dollar Tree finances the acquisition using the $5.4 billion term loan, $2.8 billion in senior unsecurednotes, and at least a portion of the $1.25 billion revolver outlined publically today, pro forma leverage would approach the 5.0x range. "We expectwe could rate the combined company as high as the mid-'BB' category, but we need to assess integration costs, and potential synergies as part of the transaction," said Standard & Poor's credit analyst Diya Iyer. "Currently, we expect the potential outcome for the corporate credit rating to be, on the lowend, in the single ‘B’ category."

The acquisition announcement comes after activist investor Carl Icahn’s push for a sale of Family Dollar earlier in the year amid lackluster operating performance, higher-than-expected store closures, and intensifying competitionin the dollar store industry amid pressure from Wal-Mart Stores Inc.’s smaller-format boxes, as well as overall weak consumer spending. Standard & Poor's believes the combined entity, with 13,326 stores and $18.4 billion in latest-12-month sales would create a formidable competitor for industry leaderDollar General Corp., which had similar sales and 11,338 stores through its latest quarter.

Dollar Tree is expecting $300 million in annual run-rate synergies to be achieved by the third year post closing but we believe such estimates are subject to execution risk given Family Dollar’s lower EBITDA margin profile, higher mix of lower-margin consumables, and weaker store productivity metrics compared to industry peers. Furthermore, weak spending trends on small ticket items may persist and strain overall industry demand. While Family Dollar and Dollar Tree have similar store sizes and broad geographic reach, we believe Family Dollar’s focus on more urban and rural low to lower-middle income customers could complement Dollar Tree’s mostly suburban demographic and focuson $1 price point offerings.

"We would expect to take a rating action in coming months and assign new ratings to Dollar Tree Inc. after meeting with management and discussing operating strategies and financial policies," said Ms. Iyer. "The recovery prospects of the combined entity would likely drive any ratings of Family Dollar Stores Inc.'s remaining debt."

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