S&P Raises L Brands' (LB) Financial Risk Profile to 'Intermediate'; Affirms Corp. Rating, Outlook

Standard & Ratings Services today affirmed all of its ratings, including its 'BB+' corporate credit rating, on L Brands (NYSE: LB) . The outlook is stable.

"We revised our assessment of L Brands’ financial risk profile to “intermediate” from “significant” to reflect the company's improved credit profile as a result of performance gains and repayment of $213 million notes that were due in November 2014," said credit analyst Mariola Borysiak. "Total debt to EBITDA improved to 2.1x at Jan. 31, 2015, from 2.4x one year earlier and funds from operations (FFO) to total debt strengthened to 30.7 percent from 26.3 percentduring the same period. We forecast these ratios will remain at about the current levels and the company will continue to generate healthy levels of free operating cash flow. We also believe management will remain aggressive with its shareholder returns, including share buybacks and special dividends."

The stable outlook on L Brands reflects our view that despite our expectation for profit growth, the company’s financial policies will remain aggressive as the company remains committed to shareholder friendly activities. We believe LBrands will manage its credit ratios around the existing levels with debt leverage remaining in the low- to mid-2x area.

Although unlikely, we could lower the rating if aggressive shareholder-friendly activities or performance erosion cause debt leverage to approach the high-3x area and FFO/debt to decline below 20 percent. For example, we calculate that more than $4 billion of incremental debt would likely trigger a negative rating action.

An upgrade is unlikely over the next 12 to 18 months because we believe the company’s financial policies will remain aggressive as it remains committed to return cash to shareholders in the form of a special dividend and share repurchases. An upgrade would be predicated on our belief that the company’s debt leverage remains below 3x and sustains FFO/total debt above 30 percent.

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