Moody's Rates SUPERVALU's (SVU) New Term Note at B1; Outlook to Stable
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Moody's Investors Service today assigned a B1 rating to SUPERVALU Inc.'s NYSE: SVU) proposed new $1.5 billion senior secured term loan. Moody's also affirmed SUPERVALU's B3 Corporate Family Rating and changed the rating outlook to stable from negative. In addition, Moody's placed the ratings of American Stores Company ("ASC") senior unsecured notes (all tranches) on review for upgrade and New Albertson's Inc.'s ("NAI") senior unsecured notes (all tranches) on review with direction uncertain. NAI is a wholly owned subsidiary of
SUPERVALU and ASC is a wholly owned subsidiary of NAI.
SUPERVALU has reached an agreement to sell all of the stock of NAI to AB Acquisition LLC, an affiliate of a Cerberus-led investor consortium. The sale includes its Albertsons, Acme, Jewel-Osco, Shaw's and Star Market stores and related Osco and Sav-on in-store pharmacies. As part of the transaction AB Acquisition LLC will assume approximately $2.0 billion of senior unsecured debt at NAI, about $467 million of senior unsecured debt at ASC as well as approximately $800 million of capital leases. Concurrently with the sale, another Cerberus-led consortium, Symphony Investors, will conduct a tender offer of up to 30% of SUPERVALU's outstanding shares at a price of $4.00 a share. The sale is not subject to approval by SUPERVALU shareholders.
The proposed term loan will be secured by real estate, equipment and the stock of Moran Foods, LLC (aka Save-A-Lot), a wholly owned subsidiary of SUPERVALU and will refinance the company's existing term loan and SUPERVALU's $490 million senior unsecured notes due 2014. As part of the transaction SUPERVALU intends to also replace its existing $1.65 billion ABL revolving credit facility with a $900 million ABL revolving credit facility. The rating on SUPERVALU's existing senior secured term loan and $490 million senior unsecured notes will be withdrawn upon closing of the transaction.
All ratings are subject to the closing of the proposed transaction and review of final documentation.
RATINGS RATIONALE
"SUPERVALU's proposed sale of the majority of its retail grocery business is a positive development as it will improve the business mix of the remaining company, significantly reduce its exposure to the highly competitive and challenging traditional retail grocery business and will lower debt levels," Moody's Senior Analyst Mickey Chadha stated. "However, the company's remaining businesses continue to face challenges as evidenced by the continuing decline in identical store sales for the company's Save-A-Lot stores and the margin erosion for its independent business which together will account for about seventy percent of the company's proforma sales and EBITDA," Chadha further stated.
The B3 Corporate Family Rating reflects SUPERVALU's weak operating performance vis-a-vis its peers and Moody's expectation that revenue and profit declines will continue in the near to medium term and credit metrics will remain weak. The rating also reflects the execution risk associated with new management's turnaround strategy including the company's continuing price investment strategy. The weak economic environment and strong competition from alternative food retailers is expected to continue to weigh on consumer spending behavior and will continue to pressure pricing. Ratings are supported by SUPERVALU's overall size in food retailing and distribution, the relative stability of the company's independent (primarily wholesale distribution) business and the potential for improved profitability and growth in the long term through leveraging fixed costs of the distribution operation and catering
to a growing segment of thrifty consumers through the Save-A-Lot segment.
The review for upgrade of ASC senior unsecured notes and the review with direction uncertain of NAI senior unsecured notes will focus on the final capital structure, projected credit metrics, liquidity and overall risk profile of AB Acquisition LLC. The review for upgrade of the ASC notes will also focus on the proposed escrow agreement between SUPERVALU and ASC under which SUPERVALU's guarantee of the senior unsecured notes of ASC will be secured with cash in an escrow account in an amount equal to the total principal outstanding of these notes. The use of the escrow will be limited to principal payments and open market purchases of these notes.
The following ratings are affirmed and LGD point estimates updated:
Corporate Family Rating at B3
Probability of Default Rating at B3-PD
SUPERVALU Inc. Senior Unsecured Debt (all tranches) at Caa1 (LGD5, 76%) from (LGD5, 71%)
The following rating is affirmed and will be withdrawn upon closing:
SUPERVALU Inc. $850 million senior secured term loan maturing 2019 at B1 (LGD2, 26%)
SUPERVALU Inc. $490 million senior unsecured notes at Caa1 (LGD5, 71%)
The following rating is assigned:
SUPERVALU Inc. proposed $1.5 billion senior secured term loan maturing 2019 at B1 (LGD3, 33%)
The following ratings are placed on review with direction uncertain:
New Albertson's Inc. Senior Unsecured Debt (all tranches) at Caa1
The following ratings are placed on review for upgrade:
American Stores Company Senior Unsecured Debt (all tranches) at Caa1
The following ratings are withdrawn:
SUPERVALU Inc. Senior Unsecured Shelf and MTN programs at (P) Caa1 (LGD5, 71%)
New Albertson's Inc. Senior Unsecured Shelf and MTN programs at Caa1 (LGD5, 71%)
SUPERVALU's stable rating outlook reflects the significant reduction in its exposure to its underperforming and highly challenging retail grocery segment. Post-sale SUPERVALU's traditional grocery retail business is expected to decline to less than 30% of total sales from about 65%, with the independent (wholesale distribution) business and the Save-A-Lot segment accounting for about 70% of its pro forma sales and pro forma EBITDA, respectively. The stable outlook also reflects the less capital intensive nature of SUPERVALU's remaining businesses, and lower proforma debt levels, multiemployer pension plan (MEPP) liabilities, and future MEPP contributions. The outlook also incorporates Moody's expectation that new management's strategic initiatives will improve SUPERVALU's profitability and credit metrics in the long term by leveraging fixed costs of its independent business.
Ratings could be upgraded if the company's strategic initiatives gain traction and result in a reversal of earnings declines and identical store sales while maintaining the quality of its store base, and a sustained strengthening of its liquidity and credit metrics. A ratings upgrade will also require sustained debt/EBITDA below 5.25 times and sustained EBITA/interest over 1.75 times.
Ratings could be downgraded if revenues, margins or profitability continue to erode or operational missteps result in a weakening of the liquidity or business profile. Ratings could also be downgraded if there is evidence of further deterioration in SUPERVALU's market position as demonstrated by sustained decline in identical store sales and margins. A downgrade could also occur if debt/EBITDA is sustained above 6.0 times or EBITA/interest is sustained below 1.25 times.
SUPERVALU Inc., is headquartered in Eden Prairie, Minnesota and proforma for the proposed sale of majority of its retail grocery stores it will have about 1,520 stores, including 1,329 Save-A-Lot stores of which 946 are licensed to third party-operators. SUPERVALU also has a food distribution business serving over 1,950 independent grocery stores in addition to its own stores. The company's proforma annual sales will be approximately $17 billion.
The principal methodology used in rating SUPERVALU Inc. was the Global Retail Industry Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
SUPERVALU and ASC is a wholly owned subsidiary of NAI.
SUPERVALU has reached an agreement to sell all of the stock of NAI to AB Acquisition LLC, an affiliate of a Cerberus-led investor consortium. The sale includes its Albertsons, Acme, Jewel-Osco, Shaw's and Star Market stores and related Osco and Sav-on in-store pharmacies. As part of the transaction AB Acquisition LLC will assume approximately $2.0 billion of senior unsecured debt at NAI, about $467 million of senior unsecured debt at ASC as well as approximately $800 million of capital leases. Concurrently with the sale, another Cerberus-led consortium, Symphony Investors, will conduct a tender offer of up to 30% of SUPERVALU's outstanding shares at a price of $4.00 a share. The sale is not subject to approval by SUPERVALU shareholders.
The proposed term loan will be secured by real estate, equipment and the stock of Moran Foods, LLC (aka Save-A-Lot), a wholly owned subsidiary of SUPERVALU and will refinance the company's existing term loan and SUPERVALU's $490 million senior unsecured notes due 2014. As part of the transaction SUPERVALU intends to also replace its existing $1.65 billion ABL revolving credit facility with a $900 million ABL revolving credit facility. The rating on SUPERVALU's existing senior secured term loan and $490 million senior unsecured notes will be withdrawn upon closing of the transaction.
All ratings are subject to the closing of the proposed transaction and review of final documentation.
RATINGS RATIONALE
"SUPERVALU's proposed sale of the majority of its retail grocery business is a positive development as it will improve the business mix of the remaining company, significantly reduce its exposure to the highly competitive and challenging traditional retail grocery business and will lower debt levels," Moody's Senior Analyst Mickey Chadha stated. "However, the company's remaining businesses continue to face challenges as evidenced by the continuing decline in identical store sales for the company's Save-A-Lot stores and the margin erosion for its independent business which together will account for about seventy percent of the company's proforma sales and EBITDA," Chadha further stated.
The B3 Corporate Family Rating reflects SUPERVALU's weak operating performance vis-a-vis its peers and Moody's expectation that revenue and profit declines will continue in the near to medium term and credit metrics will remain weak. The rating also reflects the execution risk associated with new management's turnaround strategy including the company's continuing price investment strategy. The weak economic environment and strong competition from alternative food retailers is expected to continue to weigh on consumer spending behavior and will continue to pressure pricing. Ratings are supported by SUPERVALU's overall size in food retailing and distribution, the relative stability of the company's independent (primarily wholesale distribution) business and the potential for improved profitability and growth in the long term through leveraging fixed costs of the distribution operation and catering
to a growing segment of thrifty consumers through the Save-A-Lot segment.
The review for upgrade of ASC senior unsecured notes and the review with direction uncertain of NAI senior unsecured notes will focus on the final capital structure, projected credit metrics, liquidity and overall risk profile of AB Acquisition LLC. The review for upgrade of the ASC notes will also focus on the proposed escrow agreement between SUPERVALU and ASC under which SUPERVALU's guarantee of the senior unsecured notes of ASC will be secured with cash in an escrow account in an amount equal to the total principal outstanding of these notes. The use of the escrow will be limited to principal payments and open market purchases of these notes.
The following ratings are affirmed and LGD point estimates updated:
Corporate Family Rating at B3
Probability of Default Rating at B3-PD
SUPERVALU Inc. Senior Unsecured Debt (all tranches) at Caa1 (LGD5, 76%) from (LGD5, 71%)
The following rating is affirmed and will be withdrawn upon closing:
SUPERVALU Inc. $850 million senior secured term loan maturing 2019 at B1 (LGD2, 26%)
SUPERVALU Inc. $490 million senior unsecured notes at Caa1 (LGD5, 71%)
The following rating is assigned:
SUPERVALU Inc. proposed $1.5 billion senior secured term loan maturing 2019 at B1 (LGD3, 33%)
The following ratings are placed on review with direction uncertain:
New Albertson's Inc. Senior Unsecured Debt (all tranches) at Caa1
The following ratings are placed on review for upgrade:
American Stores Company Senior Unsecured Debt (all tranches) at Caa1
The following ratings are withdrawn:
SUPERVALU Inc. Senior Unsecured Shelf and MTN programs at (P) Caa1 (LGD5, 71%)
New Albertson's Inc. Senior Unsecured Shelf and MTN programs at Caa1 (LGD5, 71%)
SUPERVALU's stable rating outlook reflects the significant reduction in its exposure to its underperforming and highly challenging retail grocery segment. Post-sale SUPERVALU's traditional grocery retail business is expected to decline to less than 30% of total sales from about 65%, with the independent (wholesale distribution) business and the Save-A-Lot segment accounting for about 70% of its pro forma sales and pro forma EBITDA, respectively. The stable outlook also reflects the less capital intensive nature of SUPERVALU's remaining businesses, and lower proforma debt levels, multiemployer pension plan (MEPP) liabilities, and future MEPP contributions. The outlook also incorporates Moody's expectation that new management's strategic initiatives will improve SUPERVALU's profitability and credit metrics in the long term by leveraging fixed costs of its independent business.
Ratings could be upgraded if the company's strategic initiatives gain traction and result in a reversal of earnings declines and identical store sales while maintaining the quality of its store base, and a sustained strengthening of its liquidity and credit metrics. A ratings upgrade will also require sustained debt/EBITDA below 5.25 times and sustained EBITA/interest over 1.75 times.
Ratings could be downgraded if revenues, margins or profitability continue to erode or operational missteps result in a weakening of the liquidity or business profile. Ratings could also be downgraded if there is evidence of further deterioration in SUPERVALU's market position as demonstrated by sustained decline in identical store sales and margins. A downgrade could also occur if debt/EBITDA is sustained above 6.0 times or EBITA/interest is sustained below 1.25 times.
SUPERVALU Inc., is headquartered in Eden Prairie, Minnesota and proforma for the proposed sale of majority of its retail grocery stores it will have about 1,520 stores, including 1,329 Save-A-Lot stores of which 946 are licensed to third party-operators. SUPERVALU also has a food distribution business serving over 1,950 independent grocery stores in addition to its own stores. The company's proforma annual sales will be approximately $17 billion.
The principal methodology used in rating SUPERVALU Inc. was the Global Retail Industry Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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