Moody's Upgraded Advance Auto Parts (AAP) to 'Baa2'; Outlook Stable

Moody's Investors Service upgraded all ratings of Advance Auto Parts (NYSE: AAP), including the Senior Unsecured rating, which was upgraded to Baa2 from Baa3. A stable outlook was assigned. This concludes the review for upgrade that commenced on June 16, 2015.

Issuer: Advance Auto Parts, Inc.

Upgrades:

....Multiple Seniority Shelf, Upgraded to (P)Baa2 from (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

Outlook Actions:

....Outlook, Changed To Stable From Rating Under Review

RATINGS RATIONALE

"The upgrade largely reflects the reduction in adjusted debt due to changes in Moody's approach for capitalizing operating leases," stated Moody's Vice President Charlie O'Shea. The updated approach for standard adjustments for operating leases is explained in the cross-sector rating methodology Financial Statement Adjustments in the Analysis of Non-Financial Corporations, published on June 15, 2015. "As a direct result of this change, Advance's leverage has improved to around 2.5 times from around 3 times under the prior methodology," O'Shea added. "In addition, since the closing of the General Parts, Inc. acquisition, Advance has delivered on its pledge to deploy virtually all of its free cash flow to repay the debt it incurred to fund the acquisition, with the result we estimate almost $600 million of the original roughly $1 billion in bank debt will have been repaid by the end of Q2 2015."

Advance's Baa2 rating considers the company's competitive position, which is significantly enhanced with the General Parts/Carquest/WorldPac acquisition, credit metrics are improved meaningfully from pre-acquisition levels due to a combination of the positive impact of the reduction in rent multiple to 5 times from 8 times and debt reduction following the elimination of share repurchases and deployment of substantially all of its free cash flow to debt reduction. The Baa2 rating is also based on favorable fundamentals for the auto parts segment-- including average age of vehicles and miles driven-- and the continuing successful expansion into the commercial/do-it-for-me sub-segment, which continues to benefit from the GPI acquisition. The stable outlook reflects our expectation that credit metrics can continue to improve as the integration of GPI continues to generate operating efficiencies. Ratings could be upgraded if the integration of GPI continues to proceed smoothly, and financial policy was managed such that debt/EBITDA was sustained below 2.5 times with EBITA/interest sustained above 7 times. Ratings could be downgraded if there are surprises with respect to the continuing integration of GPI, or if financial policy is managed such that debt/EBITDA rose above 3 times or if EBITA/interest fell below 5 times.

The principal methodology used in these ratings was Global Retail Industry published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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