S&P Downgrades Bed Bath & Beyond (BBBY) to 'BBB+'

Standard & Poor's Ratings Services lowered its corporate credit rating on Union, N.J.-based home furnishing specialty retailer Bed Bath & Beyond Inc. (BBBY)(NASDAQ: BBBY) to 'BBB+' from 'A-'. At the same time, we lowered the issue-level ratings on the company's $250 million revolving credit facility, its $300 million senior notes and $1.2 billion senior notes to 'BBB+' from 'A-'.

"The rating action reflects the company's weakened operating results and credit metrics amid a challenging operating environment and our expectation that the company will continue to use most of its free operating cash flow for repurchases rather building cash on balance sheet or reducing debt. As of Nov 28, 2015, debt to EBITDA weakened to 1.6x from 1.3x a year ago. We expect leverage will remain under 2x in the next 24 months," said credit analyst Helena Song.

The stable outlook reflects our expectation that the company will maintain generally stable operating performance in the face of a challenging retail environment. We also expect credit metrics will remain at around the current levels, including debt to EBITDA less than 2x.

We could lower the ratings if debt leverage weakens to near 2x. Given the company's relative stable operating performance trends, we do not expect EBITDA to weaken meaningfully. As such, a lower rating will more likely be the result of the company adopting more aggressive financial policy. For example, if it issues an additional $500 million debt for share repurchases or a special dividend.

Although unlikely in the near-term given our expectation of a continued challenging retail environment and our expectation of the company's ongoing meaningful share repurchases, we could raise the ratings if debt leverage improves to low 1x on a sustained basis. This could happen if the company commits to a financial policy that supports a sustained lower leverage, for example, if the company reduces share repurchases significantly by $500 million.

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