S&P Affirms Burlington Stores (BURL) at 'B'; Notes Recent Refinancing

Standard & Poor's Ratings Services today affirmed its 'B' corporate credit rating on Burlington Stores (NYSE: BURL). The outlook is stable.

At the same time, we assigned our 'B' issue-level rating and '3' recovery rating to Burlington's proposed seven-year $1.2 billion senior secured term loan. The '3' recovery rating indicates our expectation of meaningful (50%-70%) recovery in the event of payment default.

At the same time, we assigned our 'BB-' issue-level rating and '1' recovery rating to Burlington's $600 million senior secured ABL facility. The '1' recovery rating indicates our expectation of very high (90%-100%) recovery in the event of payment default.

The company will use proceeds from the proposed term loan facility, along with borrowings under its ABL facility, to repay or redeem its outstanding debt. We expect to withdraw all issue-level and recovery ratings for Burlington Coat Factory Warehouse Corp.'s, a subsidiary of Burlington Stores Inc., 2019 senior notes and term loan due 2017 once repaid or redeemed.

"Our rating affirmation reflects our view that Burlington's cash flow and leverage metrics in 2014 to 2015 will remain relatively unchanged from our prior forecast following the planned refinancing. We expect the company's pro forma cash flow to benefit from moderately lower interest expense although debt levels will be approximately the same," said credit analyst Tobias Crabtree. "Our affirmation also reflects that while Burlington's financial sponsor Bain Capital has reduced its ownership recently it continues to own more than 40% of equity. As a result, we view Bain Capital to hold significant influence on the company's financial policies at this time." Our stable rating outlook reflects our forecast that enhanced operating efficiencies, positive operating leverage, and new store growth will result in performance gains over the next year. We project EBITDA growth will result in a modestly better credit protection profile following the proposed transaction over the next year. Our outlook also incorporates our view of the company's financial policies given Bain Capital owning more than 40% of the company.

Upside scenario

We could consider an upgrade if a further reduction of private equity ownership to below 40% were to occur and our view that the risk of releveraging above 5x would be low. Under this scenario, leverage would be in the low-4x area and interest coverage would be above 3x. A higher rating would also be conditioned on the company continuing to demonstrate performance gains with positive same-store sales growth and improving margins as under our current base-case scenario.

Downside scenario

We could consider a negative rating action if consumer spending drops because of weakness in the U.S. economy or merchandise missteps hurt Burlington's performance and credit measures deteriorate. Under this scenario, same-store sales would be down in the low-single digits and margins would erode by about 100 bps. At that time, leverage would be around 6x and interest coverage would be in the low-2x area.

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