UPDATE: Dollar General (DG) senior rating rate to investment grade by Moody's
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(Updated - March 26, 2013 2:16 PM EDT)
Moody's Investors Service today upgraded Dollar General Corporation's (NYSE: DG) senior unsecured rating to Baa3 from Ba2. This rating action concludes the review for upgrade initiated on February 8, 2013.
The upgrade reflects Dollar General's strong operating performance which Moody's anticipates will continue. It also acknowledges Dollar General's proposed refinancing of its secured term loan and asset based revolving credit facility with unsecured facilities. Moody's anticipates that the proposed refinancing will be consistent with an investment grade capital structure and will successfully close in Dollar General's first fiscal quarter leaving it with a predominantly unsecured capital structure.
The following ratings are upgraded:
Senior unsecured notes to Baa3 from Ba2 (LGD 5, 86%)
Senior unsecured shelf to (P) Baa3 from (P) Ba2
The following ratings are upgraded to be withdrawn upon the closing of the new facilities and their repayment in full:
Senior secured term loan first out tranche to Baa2 from Ba1 (LGD 3, 43%)
Senior secured term loan first loss tranche to Baa2 from Ba2 (LGD 4, 68%)
The following ratings are withdrawn:
Corporate Family Rating at Ba1
Probability of Default Rating at Ba1-PD
Speculative Grade Liquidity rating at SGL-1
RATINGS RATIONALE
Dollar General's Baa3 senior unsecured rating is supported by its market position as the largest dollar-store chain in the U.S. Moody's views the dollar store sector favorably and expect that it will continue to grow given its low price points and its relative resistance to economic cycles. Dollar General's earnings are expected to continue to grow at a healthy rate, along with the industry. This will be driven by sales growth from its store expansion plans and positive comparable store sales offsetting the gross margin pressure Dollar General is facing due to a limited ability to pass on higher costs to a price sensitive customer.
The rating reflects Dollar General's solid credit metrics and its very good liquidity. The rating also acknowledges Dollar General's balanced and prudent financial policy, the cornerstone of which is a 3.0 times lease adjusted debt to EBITDAR targeted leverage ratio. Moody's anticipates that Dollar General will use excess cash flow after capital expenditures to make share repurchases and may potentially also borrow to finance share repurchases but only to the extent it stays within its leverage target.
Dollar General's ratings are constrained by its geographic concentration. While operating over 10,000 stores in 40 states, Dollar General is heavily concentrated in the south, which accounts for approximately 47% of their store base. However, this concentration risk may slowly dissipate as Dollar General continues to grow its store count and break ground in new states, much like their launch into California.
The stable outlook reflects that while earnings will continue to grow, credit metrics will remain in line with the Baa3 rating level over the next twelve to eighteen months. The stable outlook also reflects that we do not anticipate any changes to Dollar General's 3.0 times lease adjusted debt to EBITDAR leverage target. Additionally, it reflects that the company will maintain solid liquidity over the near term and will manage its medium term debt maturities as typical of an investment grade profile.
An upgrade would also require continued strong operating performance particularly in light of Dollar General's sizable expansion into California. Quantitatively, an upgrade would require retained cash flow to net debt above 25% and EBITA to interest expense to remain above 5.0 times.
Downward rating pressure would result should Dollar General's financial policies become more aggressive. Ratings could also be downgraded should Dollar General's operating performance deteriorate or debt levels increase such that debt to EBITDA is sustained above 3.5 times or EBITA to interest expense falls below 4.0 times.
The principal methodology used in this rating was the Global Retail Industry Methodology published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Moody's Investors Service today upgraded Dollar General Corporation's (NYSE: DG) senior unsecured rating to Baa3 from Ba2. This rating action concludes the review for upgrade initiated on February 8, 2013.
The upgrade reflects Dollar General's strong operating performance which Moody's anticipates will continue. It also acknowledges Dollar General's proposed refinancing of its secured term loan and asset based revolving credit facility with unsecured facilities. Moody's anticipates that the proposed refinancing will be consistent with an investment grade capital structure and will successfully close in Dollar General's first fiscal quarter leaving it with a predominantly unsecured capital structure.
The following ratings are upgraded:
Senior unsecured notes to Baa3 from Ba2 (LGD 5, 86%)
Senior unsecured shelf to (P) Baa3 from (P) Ba2
The following ratings are upgraded to be withdrawn upon the closing of the new facilities and their repayment in full:
Senior secured term loan first out tranche to Baa2 from Ba1 (LGD 3, 43%)
Senior secured term loan first loss tranche to Baa2 from Ba2 (LGD 4, 68%)
The following ratings are withdrawn:
Corporate Family Rating at Ba1
Probability of Default Rating at Ba1-PD
Speculative Grade Liquidity rating at SGL-1
RATINGS RATIONALE
Dollar General's Baa3 senior unsecured rating is supported by its market position as the largest dollar-store chain in the U.S. Moody's views the dollar store sector favorably and expect that it will continue to grow given its low price points and its relative resistance to economic cycles. Dollar General's earnings are expected to continue to grow at a healthy rate, along with the industry. This will be driven by sales growth from its store expansion plans and positive comparable store sales offsetting the gross margin pressure Dollar General is facing due to a limited ability to pass on higher costs to a price sensitive customer.
The rating reflects Dollar General's solid credit metrics and its very good liquidity. The rating also acknowledges Dollar General's balanced and prudent financial policy, the cornerstone of which is a 3.0 times lease adjusted debt to EBITDAR targeted leverage ratio. Moody's anticipates that Dollar General will use excess cash flow after capital expenditures to make share repurchases and may potentially also borrow to finance share repurchases but only to the extent it stays within its leverage target.
Dollar General's ratings are constrained by its geographic concentration. While operating over 10,000 stores in 40 states, Dollar General is heavily concentrated in the south, which accounts for approximately 47% of their store base. However, this concentration risk may slowly dissipate as Dollar General continues to grow its store count and break ground in new states, much like their launch into California.
The stable outlook reflects that while earnings will continue to grow, credit metrics will remain in line with the Baa3 rating level over the next twelve to eighteen months. The stable outlook also reflects that we do not anticipate any changes to Dollar General's 3.0 times lease adjusted debt to EBITDAR leverage target. Additionally, it reflects that the company will maintain solid liquidity over the near term and will manage its medium term debt maturities as typical of an investment grade profile.
An upgrade would also require continued strong operating performance particularly in light of Dollar General's sizable expansion into California. Quantitatively, an upgrade would require retained cash flow to net debt above 25% and EBITA to interest expense to remain above 5.0 times.
Downward rating pressure would result should Dollar General's financial policies become more aggressive. Ratings could also be downgraded should Dollar General's operating performance deteriorate or debt levels increase such that debt to EBITDA is sustained above 3.5 times or EBITA to interest expense falls below 4.0 times.
The principal methodology used in this rating was the Global Retail Industry Methodology published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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