Moody's Lowers Outlook on Signet (SIG) to Negative; Ratings Affirmed

August 25, 2016 5:06 PM EDT

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Moody's Investors Service, ("Moody's") revised Signet UK Finance plc's rating outlook from stable to negative. All other ratings including the Baa3 senior unsecured rating were affirmed. Signet UK Finance plc is an indirect subsidiary of Signet Jewelers Limited (together, "Signet"). The change in outlook is prompted by the company's announcement of the issuance of $625 million of convertible preferred stock to repurchase common shares. All ratings actions are detailed below.

The change in the outlook from stable to negative reflects Moody's view that issuance of the $625 million convertible preferred to a private equity investor, Leonard Green & Partners, L.P., increases the risk associated with the company's financial policy. "Although we recognize Signet's commitment to maintain an investment grade profile rating with a publicly stated leverage target of 3.5x (per the company's definition), a private equity investment and representation at the board level could support a more aggressive financial profile. Our Baa3 rating and credit outlook assumes the current structure of the credit business, as it remains under strategic review by the company.


..Issuer: Signet UK Finance plc

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

....Backed Senior Unsecured Shelf, Affirmed (P)Baa3

Outlook Actions:

....Outlook, Changed To Negative From Stable


Signet's Baa3 senior unsecured rating reflects the company's position as the largest specialty retail jeweler in the U.S., Canada and U.K., its well-recognized brand names, and solid execution and marketing, all of which drive strong profitability. The rating also acknowledges the strategic benefits of the May 2014 Zale acquisition, which strengthened Signet's leading position in the U.S. while adding the leading jewelry store brand in Canada. The rating also reflects Signet's excellent liquidity, supported by the expectation that balance sheet cash and cash flow will be more than sufficient to cover required funding needs over the next 12-18 months.

In light of the negative outlook, an upgrade in the near-term is unlikely. However, the rating could be stabilized to the extent that its overall operations including its credit business improve and financial policy remains conservative. The $625 million convertible preferred is treated as debt for all Moody's credit metrics.

Factors that could result in an upgrade include continued profitable growth and margin expansion while maintaining excellent liquidity and a commitment to stronger investment grade credit metrics, such as lease-adjusted Debt/EBITDA below 2.5x, EBITA/Interest expense above 5.5x and Retained Cash Flow/Debt above 30% on a sustained basis.

Factors that could result in a downgrade include a material decline in sales or operating margins, a sale or optimization of its credit business that negatively impacts its credit and/or business profile, more aggressive financial policies, increased private equity ownership, or a meaningful erosion in liquidity. Quantitatively, ratings could be downgraded if lease-adjusted Debt/EBITDA rises above 3.5x, Retained Cash Flow /Net Debt falls below 20% or adjusted EBITA/Interest falls below 4.0x on a sustained basis.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Ratings Methodologies page on for a copy of this methodology.

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