UPDATE: S&P Downgrades Grainger (GWW) to 'AA+'; Outlook Lowered to Negative

(Updated - April 16, 2015 10:28 AM EDT)

Standard & Poor's Ratings Services lowered the corporate credit rating on industrial distributor Grainger (NYSE: GWW)
to 'AA' from 'AA+'. The outlook is negative. At the same time, we affirmed the 'A-1+' short-term corporate credit rating.

"The rating action follows the announcement that U.S-based Grainger's board of directors has approved a $3 billion share repurchase program, to be completed through 2017, of which $1.8 billion will be debt funded," said Standard & Poor's credit analyst Liley Mehta. "The downgrade reflects our view of the expected decline in cash flow protection measures because of the debt-financed share repurchases as well as Grainger's more aggressive financial risk profile," she added.

Our rating action reflects our assessment of the increased financial risk to Grainger posed by the announced debt-funded share repurchase program. We continue to assess the company's business risk profile as "excellent" but have revised its financial risk profile to "modest" from "minimal." Our short-term rating on Grainger is 'A-1+', which reflects our long-term corporate credit rating on the company and its "adequate" liquidity.

The negative outlook reflects our expectation that the company's shift to a less conservative financial policy could result in sizeable debt-financed acquisitions or additional share repurchases. This could result in further deterioration of the credit measures such that the key credit ratio of FFO to adjusted debt would fall below 50% with no prospects of improvement.

We could lower the ratings if potential debt-financed acquisitions or weaker operating performance results in credit measures that weaken beyond our current expectations. We think the FFO to total net debt ratio could weaken below 50% if the company completed debt-financed acquisitions of about $500 million or larger, or if revenues were flat to declining and EBITDA margins were two percentage points lower than we expect.

We could revise the outlook to stable if Grainger maintains its operating performance and credit measures in line with our expectations, and the stated financial policy does not become more aggressive. An indication of this would be if Grainger does not engage or express plans to engage, in additional large acquisitions or share repurchases over the next two years.

Key points:

• W.W. Grainger Inc. (Grainger) has announced its intention to complete $3 billion in share repurchases over three years. The company will fund $1.8 billion in buybacks with new permanent debt, and the balance $1.2 billion share repurchases will be funded through operating cash flow. We are lowering our long-term ratings on Grainger to 'AA' from 'AA+' based on our expectation that the company's key leverage credit measures will deteriorate such that funds from operations (FFO) to total net debt will range between 50% and 60% upon completion of the announced share-buyback plan.
• We are affirming the company's A-1+ short-term rating.
• The negative outlook reflects the risk that the shift to a less conservative financial policy, and appetite for potential debt-financed acquisitions could cause FFO to total debt to fall below 50%.

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