Moody's Changes Pep Boys' (PBY) Ratings Review to 'Direction Uncertain'

Moody's Investors Service changed the direction of the review of the ratings of The Pep Boys.- Manny, Moe, & Jack ("Pep Boys")(NYSE: PBY), which includes the B1 Corporate Family Rating, to review-direction uncertain from review for upgrade.

"Today's change in the potential outcome of Pep Boys' rating review is due to the announcement that Icahn Enterprises has launched an offer to acquire Pep Boys for $15.50 per share, trumping the existing $15.00 a share offer from Bridgestone," stated Moody's Vice President Charlie O'Shea. "Given the uncertainty with respect to the potential final purchaser, and the fact that a financial buyer, though we acknowledge Icahn Enterprises does own a company in this general sub-sector of retail, is likely to behave differently than a strategic buyer in terms of capitalization, we are no longer able to definitively state that the impact on ratings is likely to be positive," continued O'Shea.

On Review Direction Uncertain:

..Issuer: The Pep Boys -- Manny, Moe & Jack (The)

.... Probability of Default Rating, Placed on Review Direction Uncertain

.... Corporate Family Rating (Local Currency), Placed on Review Direction Uncertain

....Senior Secured Bank Credit Facility (Local Currency) Oct 11, 2018, Placed on Review Direction Uncertain

Outlook Actions:

..Issuer: The Pep Boys -- Manny, Moe & Jack (The)

....Outlook, Continues as Rating Under Review

No Action Taken on Speculative Grade Liquidity Rating of SGL-1

RATINGS RATIONALE

Pep Boys B1 Corporate Family Rating reflects increased stability in overall operating performance, which effectively improves credit metrics given its low level of funded debt. We expect Pep Boys to maintain lease adjusted debt to EBITDA around 4.0 times, and EBITA to interest expense above 1.0 time. The rating also considers Pep Boys challenged competitive position, where it significantly lags its rated peer group consisting of AutoZone, Inc. (Baa1, Stable), O'Reilly Automotive Inc (Baa2, Stable), and Advance Auto Parts, Inc. (Baa2, Stable) from an operating performance perspective, as evidenced by its much weaker margins. Pep Boys continues to benefit from the positive industry fundamentals of the automotive parts and repair segment, which we believe will remain one of the top performing sectors in retail for the next 12-18 months. The challenge for Pep Boys going forward will be its ability to continue generating additional traction on the revenue side, particularly in its service component, which when combined with lower interest costs, will help the company strengthen its weak interest coverage. Ratings could be upgraded if operating performance continues to improve, which would demonstrate that management's strategy was generating continued traction as evidenced by improved levels of EBITDA, and if financial policy remains conservative. Quantitatively, if debt/EBITDA is sustained below 4.25 times or if RCF/net debt is sustained above 20%, and EBITA/interest expense is sustained above 2 times, ratings could be upgraded. Ratings could be downgraded in the event operating performance deteriorates, which could indicate that management's strategy was losing traction, or if financial policy were to become aggressive. Quantitatively, ratings could be downgraded if debt/EBITDA increased above 5 times or RCF/net debt dropped below 12% or EBITA/interest remained around 1.5 times for a sustained period. Stagnating or falling sales and/or margins, which could indicate that the company's strategic execution was faltering, could lead to negative rating pressure.

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