S&P Boosts Issue-Level Rating on Dollar General (DG) to BBB-
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Standard & Poor's Ratings Services said today it raised the issue-level rating on Dollar General Corp.'s (NYSE: DG) existing senior unsecured notes to 'BBB-' from 'BB+'. The upgrade reflects the repayment and release of collateral after the company refinanced secured debt with unsecured debt. Dollar General recently issued a $1.0 billion unsecured term loan due 2018, a $400 million 1.875% unsecured notes due 2018, and a $900 million 3.25% unsecured notes due 2023, and used the aggregate proceeds to refinance its existing secured term loans and borrowings under its revolving credit facility.
At the same time, we withdrew the ratings on the existing $1.084 billion term loan B due 2014 ($311 million 'first loss' term loan and $772 million 'first out' term loan) and $880 million term loan C due 2017.
We also affirmed our 'BBB-' corporate credit rating. The outlook is stable.
"The ratings on Goodlettsville Tenn.-based Dollar General Corp. reflect Standard & Poor's Ratings Services' expectation that this leading dollar store chain (about 1.5x the size of its next competitor Family Dollar in terms of revenue) will maintain credit protection measures in line with its "intermediate" financial risk profile, and that its strong market position will continue to support its "satisfactory" business risk profile," said credit analyst Ana Lai.
The stable outlook on Dollar General reflects our view that Dollar General will maintain its positive operating momentum, though at a more moderate pace. We expect revenue growth to moderate to the mid-to high-single-digit range with margins expanding modestly because of positive sales leverage. Despite strong sales growth, margin gains will be tempered by cost increases to support a rapid store expansion program. We believe there is little improvement in Dollar General's credit protection measures as we expect EBITDA growth to be largely offset by its growing lease obligations from its rapid store expansion. We expect Dollar General to use the bulk of its free cash flow to fund share repurchases rather than debt reduction. In our view, the company will manage its share repurchase activity to maintain debt leverage target of below 3.0x.
Although unlikely in the next year, we would consider lowering the rating if performance falls significantly below our expectations due to competitive pressure, poor execution, or an over-expansion of its stores. Under this scenario, new store productivity would decline and same-store sales would turn negative, resulting in revenue declining in the low-single digits and gross margins falling by more than 50 basis points (bps). At that time, leverage would approach the mid-3x area. Moreover, debt-financed share repurchases that cause debt leverage to weaken to above 3x could lead to a downgrade.
We would consider an upgrade if performance exceeds our expectations, with the company sustaining leverage in the low-2x area and funds from operations-to-total debt above 40% over the intermediate term. Under this scenario, revenues would be in the low-teen area and gross margin would expand by 150 bps.
At the same time, we withdrew the ratings on the existing $1.084 billion term loan B due 2014 ($311 million 'first loss' term loan and $772 million 'first out' term loan) and $880 million term loan C due 2017.
We also affirmed our 'BBB-' corporate credit rating. The outlook is stable.
"The ratings on Goodlettsville Tenn.-based Dollar General Corp. reflect Standard & Poor's Ratings Services' expectation that this leading dollar store chain (about 1.5x the size of its next competitor Family Dollar in terms of revenue) will maintain credit protection measures in line with its "intermediate" financial risk profile, and that its strong market position will continue to support its "satisfactory" business risk profile," said credit analyst Ana Lai.
The stable outlook on Dollar General reflects our view that Dollar General will maintain its positive operating momentum, though at a more moderate pace. We expect revenue growth to moderate to the mid-to high-single-digit range with margins expanding modestly because of positive sales leverage. Despite strong sales growth, margin gains will be tempered by cost increases to support a rapid store expansion program. We believe there is little improvement in Dollar General's credit protection measures as we expect EBITDA growth to be largely offset by its growing lease obligations from its rapid store expansion. We expect Dollar General to use the bulk of its free cash flow to fund share repurchases rather than debt reduction. In our view, the company will manage its share repurchase activity to maintain debt leverage target of below 3.0x.
Although unlikely in the next year, we would consider lowering the rating if performance falls significantly below our expectations due to competitive pressure, poor execution, or an over-expansion of its stores. Under this scenario, new store productivity would decline and same-store sales would turn negative, resulting in revenue declining in the low-single digits and gross margins falling by more than 50 basis points (bps). At that time, leverage would approach the mid-3x area. Moreover, debt-financed share repurchases that cause debt leverage to weaken to above 3x could lead to a downgrade.
We would consider an upgrade if performance exceeds our expectations, with the company sustaining leverage in the low-2x area and funds from operations-to-total debt above 40% over the intermediate term. Under this scenario, revenues would be in the low-teen area and gross margin would expand by 150 bps.
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