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Rating Action:

MOODY'S ASSIGNS B2 TO PROPOSED SENIOR NOTE ISSUE OF GREAT ATLANTIC & PACIFIC TEA CO.; CONFIRMS ALL OTHER RATINGS

13 Dec 2001
MOODY'S ASSIGNS B2 TO PROPOSED SENIOR NOTE ISSUE OF GREAT ATLANTIC & PACIFIC TEA CO.; CONFIRMS ALL OTHER RATINGS

Approximately $1.35 Billion of Debt Affected.

New York, December 13, 2001 -- Moody's Investors Service rated the following proposed new issue of The Great Atlantic & Pacific Tea Company, Inc ("A&P"):

$225 million senior notes assigned a rating of B2.

Moody's also confirmed all other ratings of the company as follows:

$425 million secured revolving credit facility at Ba2,

$200 million of 7.70% senior notes (due 2004) at B2,

$300 million of 7.75% senior notes (due 2007) at B2,

$200 million of 9 1/8% senior notes (due 2039) at B2,

Senior unsecured shelf at P(B2),

Subordinated shelf at P(B3),

Junior subordinated shelf at P(B3),

Preferred stock shelf at P(Caa1),

Preferred trust securities issued by A&P Finance I, A&P Finance II, and A&P Finance III at P(B3),

Senior implied rating at B1, and

Long term issuer rating at B2.

Proceeds from the new issue will principally be used to retire the senior notes due in 2004; it is anticipated that the ratings on the 2004 notes will be withdrawn once this transaction is complete. The rating outlook is negative.

The ratings consider the company's leveraged financial condition, weak return on assets, and the competitive nature of the supermarket industry. Difficulties in achieving operating synergies (partially caused by the widely scattered markets in which the company operates) and the need to use a significant proportion of expected future cash flows for store upgrades also impact the ratings.

However, the ratings recognizes the company has the #1 or #2 market position in its four most important markets and the progress that the company has made in closing underperforming stores and exiting several secondary markets. The relatively high gross margins (resulting from high perimeter department sales) and the meaningful equity base (both in terms of market value and book value) underlying the company's capital structure also are strengths of the company.

The negative outlook reflects our concerns about uneven regional performance and the outcome of efforts in turning around operations at a significant proportion of stores. Success at making operating improvements that meaningfully increase return on assets would benefit the ratings. However, if further analysis causes more stores to be written off or if the pace of remodels and new store construction exceeds internally generated cash flow, then the ratings could be negatively affected.

The Ba2 rating on the secured revolving credit facility ($340 million available to the Great Atlantic & Pacific Tea Co., Inc. and $85 available to the Great Atlantic & Pacific Co. of Canada) considers that this debt, besides enjoying guarantees of the company's operating subsidiaries, is secured by a borrowing base comprised of inventory and owned real estate. Moody's believes that the lenders are well protected by collateral value and the structure of the facility and expects that much of the credit facility will remain undrawn even during seasonal peaks. As of September 2001, $100 million was outstanding.

The B2 rating on the unsecured notes considers that this debt is issued at the holding company level and does not receive guarantees from the operating subsidiaries. These unsecured notes are effectively subordinate to significant obligations including the secured revolving credit facility and trade accounts payable.

Lease adjusted leverage of 5.2 times for the twelve months ending September 2001 has remained fairly stable over the past several years. Cash flow (as measured by EBITDA) has been insufficient to fund both cash interest payments and capital expenditures over the past several years; going forward, Moody's expects that the company's business plan of a relatively modest program of new stores and major remodels will require the reinvestment of virtually all operating cash flow. Return on assets of about 1% (as measured by EBIT to Assets) for the twelve months ending September 2001 was weak. While the credit facility currently has ample liquidity, the necessity to utilize much of the revolving credit facility or failure to make progress on improving return on assets would impact Moody's view of the operational and financial risks facing the company.

The company operates in several different areas of North America. The regions around Detroit, New Orleans, Toronto, and the New York Metro area account for about 80% of the company's revenue, while most operating profits come from the Northeast and Canada. Other regions are much less profitable than the company average. Moody's believes that the wide geographic dispersion of the company's stores and warehouses limits efficiencies in purchasing, marketing, and distribution

In many respects, the company's operating results fall below industry norms. In November 2001, the company announced that it will take a charge of about $120 million (of which $110 is non-cash) to close 39 underperforming stores, most of which had been opened over the past five years. Moody's also understands that the company will achieve most of the anticipated savings from the Great Renewal 2 supply chain initiative, even though results are somewhat delayed from what we had originally anticipated. Besides a sustained improvement in leverage, substantial improvements towards industry operating norms will be vital to the company's progress up the ratings scale.

The Great Atlantic & Pacific Tea Company, Inc., headquartered in Montvale, New Jersey, operates about 750 supermarkets in 16 states, the District of Columbia, and Ontario.

New York
Michael Rowan
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Richard Baldwin
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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