NEW YORK (Standard & Poor's) March 20, 2013--Standard & Poor's Ratings
Services today assigned its 'CCC+' corporate credit rating to Boise,
Idaho-based supermarket chain New Albertson's Inc. (NAI), under its new
ownership. The outlook is stable.
Concurrently, we are raising the issue-level rating on subsidiary America
Stores Co. (ASC)'s notes one notch to 'B' from 'B-', and changing the recovery
rating to '1' from '5'. The '1' recovery rating indicates our expectation of
very high (90% to 100%) recovery of principal in the event of payment default.
The change in the recovery rating reflects that ASC will place in escrow the
principal amount of the notes, as stipulated between SUPERVALU Inc.
(SUPERVALU), which guarantee those notes, and the purchasing parties.
We are also lowering the rating on NAI's senior unsecured notes to 'CCC' from
'B-'. The recovery rating on those notes remains '5', which indicates our
expectation of modest (10% to 30%) recovery of principal in the event of
default. The lower rating on the notes reflects the lower corporate credit
rating of NAI relative to the current rating on SUPERVALU.
We expect AB Acquisition LLC, an entity owned by a consortium of investors led
by Cerberus Capital Management L.P. (Cerberus), to purchase NAI from
SUPERVALU. The NAI purchase will include the operating assets of the
Jewel-Osco, Shaw's, Star, ACME, and Albertson's banners. At the same time, we
expect Albertson's LLC, which is also owned by AB Acquisition LLC, to purchase
the Albertson's stores and associated assets from NAI. We expect these
transitions to close simultaneously before the end of the month.
"The rating on NAI reflects our view of the company's financial risk profile
as 'highly leveraged,, based on what we expect to be weak credit protection
measures over the next year and our assessment of a 'vulnerable' business risk
profile," said Standard & Poor's credit analyst Charles Pinson-Rose. The
financial risk profile incorporates our view of credit metric erosion over the
next year based on the company's substantial debt and debt-like obligations
coupled with performance declines. It also reflects our expectation that the
company will be free operating cash flow neutral, though mainly because
capital spending will be depressed, in our view. We also believe NAI will
maintain "adequate" liquidity because of a likely substantial cash balance
after it receives cash considerations from the sale of the Albertson's stores
and associated assets from Albertson's LLC.
We also view the company's business risk profile as "vulnerable," which
incorporates the historically weak sales trends at the acquired stores,
operating measures that will likely be worse than industry peers, and the
intense competition in the food retail industry.
The outlook is stable and incorporates our expectation that profits should
decline substantially over the next year, but stabilize from that point
forward. This would allow the company to be approximately cash flow neutral
and maintain adequate liquidity. However, we believe the company will remain
highly leveraged over the next year. Given the company's cash balances, it
should have adequate liquidity sources even if performance is substantially
weaker than our expectations.
We would only consider a positive rating if leverage was in the mid to low 7x
area and coverage in the mid 1x range. We estimate that EBITDA would need to
be about 35% higher than levels forecasted for fiscal 2014 or slightly higher
than current pro-forma levels. We do not believe this likely over the next two
years given the company's strategies and industry competition.
We would likely consider a negative rating action if we felt liquidity
concerns were more acute, and if sources were less than available uses over
the next year. Moreover, any financial policy decision that meaningfully
depletes cash on hand could cause us to reassess the company's rating.