MOODY'S ASSIGNS Ba3 RATING TO JITNEY-JUNGLE STORES OF AMERICA, INC.'S SECURED REVOLVING CREDIT FACILITY, CONFIRMS THE B2 RATING ON ITS SR UNSECURED NOTES, AND ASSIGNS B3 RATING TO ITS SR SUB NOTES
New York, 09-04-97 -- Moody's Investors Service assigned a preliminary Ba3 rating(pending completion of documentation) to Jitney-Jungle Stores of America, Inc.'s $150 million secured revolving credit facility, confirmed the B2 rating on its senior unsecured notes due 2006, and assigned a B3 rating its senior subordinated notes due 2007. This concludes the review of Jitney-Jungle's senior unsecured notes for possible downgrade which commenced on July 9, 1997. The rating outlook is stable.
The ratings reflect Jitney-Jungle's high financial leverage following the acquisition of Delchamps, the geographic concentration of its operations, the intense competition in its markets, and management's acquisitive growth strategy. While Jitney's management is highly regarded, the acquisition of Delchamps doubles its size and the near term operating risks associated with the integration are significant.
But the rating also recognizes that Jitney and Delchamps are well established in their core markets, and that management will likely be able to achieve modest debt reductions in the initial periods following the acquisition. The rating also considers that the combination will enable the company to leverage its existing corporate overhead, distribution expenses, purchasing power, and investment in technology.
The revolving credit facility is secured by all of the company's tangible and intangible assets. While we believe that the tangible collateral would provide the bank lenders only modest protection, the bank lenders are supported by the company's enterprise value. Thus the rating on the revolving credit facility recognizes the benefit that the collateral would likely provide the bank lenders in a distressed scenario.
The rating on the senior unsecured notes continues to recognize that the notes are effectively subordinated to a material amount of secured debt. While we expect that management will achieve modest debt reductions in the near term, we believe that the company will continue to pursue acquisitions and will likely use the bank facility to finance these acquisitions.
The subordinated debt rating recognizes the contractual subordination of the notes to a sizable amount of senior debt. The rating also considers the modest cushion that the company's enterprise value provides the subordinated holders.
Total debt is 4.8 times proforma combined EBITDA reducing to 4.3 times once consideration is given to the cost savings that management has identified. We believe that it is likely that management will achieve these savings. Off-balance sheet liabilities are substantial and adjusted debt (includes operating leases) is 5.4 times EBITDAR. Operating lease obligations are large since all but one of the company's stores are leased, and Delchamps' leases are relatively expensive (Delchamps' rent expense was 4.1% of its revenues in fiscal 1997, whereas rent expense for the average speculative grade supermarket is approximately 1.5% revenues).
In evaluating financial leverage we have also considered that redeemable preferred stock accounts for the majority of the junior capital, and that a significant portion of the preferred stock will require cash dividends in 2001 (we estimate that the annual after tax cash dividend obligation will be $6 million). In addition, we have also considered that the company's sizable restructuring obligations (expected to total $52 million) will have ongoing cash servicing requirements.
The acquisition of Delchamps broadens the company's operating territory and provides a strong presence in the Mobile-Pensacola corridor. But operations are still heavily concentrated with approximately 50% of the company's stores in its four largest markets. We expect that management will continue to pursue moderate sized acquisitions in contiguous markets and to build upon its presence in areas such as Memphis, Tennessee.
Jitney Jungle Stores of America, Inc., headquartered in Jackson, Mississippi, operates 105 supermarkets and 53 gasoline stations across Mississippi, Tennessee, Arkansas, Louisiana, and Florida. Delchamps Inc., which is currently headquartered in Mobile, Alabama, operates 118 supermarkets in Alabama, Florida, Mississippi, and Louisiana, and ten liquor stores in Florida.
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