S&P Affirms Ratings on Best Buy (BBY); Assigns 'BB' to $1.25B Unsecured Revolver

Standard & Poor's Ratings Services assigned its 'BB' issue-level rating and '3' recovery rating to Best Buy's (NYSE: BBY) $1.25 billion five-year senior unsecured revolving credit facility yesterday, July 31, 2014. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%) in a payment default scenario.

At the same time, we affirmed all ratings on the company, including the 'BB' corporate credit rating. The outlook is stable.

"The affirmed ratings reflect our opinion of the intense competition Best Buy faces from online retailers, discounters, and other big stores along with our forecast of stable credit metrics," said credit analyst Tobias Crabtree. "We think a cautious consumer spending outlook will likely constrain a meaningful turnaround in the company's sales growth and profitability over the next
year."

The stable rating outlook on Best Buy incorporates our expectation that credit ratios should be relatively steady over the next 12 months even if sales growth is slightly negative. We expect the industry environment to remain difficult, which could lead to profit pressures, but expect Best Buy to be able to continue generating good free cash flow. We forecast debt to EBITDA in the high 1x and FFO to debt of about 40%.

An upgrade could occur if Best Buy were to reverse ongoing negative operating trends, increase its store traffic and conversions, and return to sales growth. For a higher rating, we would anticipate better-than-currently anticipated operating performance results, leading to an improved business risk assessment. Other metrics could be improving cash flow and leverage measures with FFO to debt sustained above 45%. We believe the 2014 holiday season will provide insights into the company's progress with execution.

We could consider a downgrade if profits declined meaningfully from our base-case scenario as a result of intense industry competition or if management's strategic initiatives are unsuccessful. Under the downside scenario, forecast FFO to debt would fall below 30% and forecast EBITDA would decline by about 40%, which could occur as a result of mid-single-digit revenues decline and approximately 300 basis points of margin contraction.

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