MOODY'S ASSIGNS Ba3 RATING TO NEW BANK LOAN OF A&P, UPGRADES SPECULATIVE GRADE LIQUIDITY RATING TO SGL-2, AND CONFIRMS ALL FUNDAMENTAL RATINGS; OUTLOOK REMAINS NEGATIVE
Approximately $1.1 Billion of Debt Affected.
New York, January 09, 2004 -- Moody's Investors Service assigned a rating of Ba3 to the new $400
million secured revolving credit facility of The Great Atlantic &
Pacific Tea Company, Inc ("A&P"), upgraded the Speculative
Grade Liquidity Rating to SGL-2 from SGL-3, and confirmed
all other fundamental ratings. Upgrade of the Speculative Grade
Liquidity rating to SGL-2 reflects Moody's belief that the
company may run a free cash flow deficit over the next 12 months,
but less stringent covenants in the new bank loan relative to the replaced
bank loan combined with good liquidity resources from about $90
million in excess cash and around $290 million in revolving credit
facility availability (as of Nov. 29, 2003) allow the company
to comfortably meet its short-term operating and financial obligations.
Benefiting the fundamental ratings are the company's good liquidity
position, success at maintaining vendor support, and important
market positions in its core markets of the New York metro area and southern
Ontario. However, the inability to make progress at improving
weak operating margins, continued weak performance at the non-core
supermarket divisions, and weak return on assets limit the ratings.
The rating outlook continues to be negative.
The following rating is assigned:
- $400 million revolving credit facility at Ba3.
The following rating is upgraded:
- Speculative Grade Liquidity rating to SGL-2 from SGL-3.
The following ratings are confirmed:
- $ 22 million of 7.70% senior notes (Jan.
2004) at B3,
- $229 million of 7.75% senior notes (2007)
- $231 million of 9.125% senior notes (2011)
- $200 million of 9.375% senior notes (2039)
- Senior unsecured shelf at (P)B3,
- Subordinated shelf at (P)Caa1,
- Junior subordinated shelf at (P)Caa1,
- Preferred stock shelf at (P)Caa2,
- Preferred trust securities issued by A&P Finance I,
A&P Finance II, and A&P Finance III at (P)Caa1,
- Senior implied rating at B2, and the
- Long-term issuer rating at B3.
The rating on the retired $425 million revolving credit facility
has been withdrawn and the rating on the 7.70% senior note
issue will be withdrawn following repayment on January 15, 2004.
The ratings consider the company's leveraged financial condition,
the long-term inability to improve subpar operating margins (in
spite of strategy and management changes), and the competitive nature
of the supermarket industry. The weak return on assets, which
causes Moody's to conclude that further asset rationalization will
prove necessary, and the continuous pattern of one-time charges
adversely impact the ratings. 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
free cash flow for store upgrades and information technology investment
also constrain the ratings.
However, the company's good liquidity from excess cash and revolving
credit facility availability, continued incremental progress in
working capital efficiency, and the relatively high gross margins
(resulting from high perimeter department sales) benefit the long-term
ratings. The ratings also recognize that the company has important
positions in its key markets around the New York metro area and Toronto.
The negative outlook considers the possibility that ratings may decline
if the operating regions outside of southern Ontario and New York metro
area continue to experience losses, return on assets does not improve,
or the company needs to substantially draw on the credit facility.
Besides material improvements in debt protection measure, substantial
progress towards industry operating norms is a prerequisite for progress
up the rating scale. The company has indicated that it would consider
selling any operating division except for the two profitable divisions
around the New York metro area and southern Ontario, but Moody's
does not regard potential divestiture of operating divisions or assets
as a reliable liquidity source.
The Ba3 rating on the secured revolving credit facility ($330 million
available to The Great Atlantic and Tea Company, Inc. and
$70 million available to The Great Atlantic & Pacific Company
of Canada) considers that this debt class, besides enjoying guarantees
of the company's operating subsidiaries, is secured by a borrowing
base comprised of inventory, certain liquid accounts receivable,
and prescription files. The company has unpledged assets with significant
value, such as real estate, that is not part of the collateral
package. Placement of the secured bank loan rating at two notches
above the senior implied rating reflects Moody's opinion that the lenders
are well protected by liquid collateral and the structure of the facility.
Moody's expects that much of the credit facility will remain undrawn
even during seasonal inventory peaks and that the fixed charge coverage
ratio test will not become relevant.
The B3 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 operating company obligations including the bank facility
and trade accounts payable. Except for the relatively small $22.1
million note that matures on Jan. 15, 2004, none of
the company's bonds come due before 2007.
The company's operating and debt protection measures have modestly improved
over the last two years, but leverage is still high and return on
assets is still low. For the twelve months ending Nov. 29,
2003, lease adjusted leverage approximated 6 times (assumes the
$60.1 million impairment charge to write-down the
long-lived assets and goodwill at Farmer Jack's is added
back) and return on assets was slightly negative. Gross margin
of 27.4% for the twelve months ending Nov. 29 was
reasonable for the supermarket industry, but operating profit (adds
back one-time operating charges and income) has remained near break-even
for several years. EBITDA margin for the 12 months ending Nov.
29 equaled 2.0% compared to 2.5% and 4.2%
in the Fiscal Years ending Feb. 2003 and Feb. 2002,
respectively. Moody's anticipates that cash flow (as measured by
EBITDA) probably will fall below $200 million for the February
2004 fiscal year. Obligations over the next 12 months include cash
interest expense of about $80 million, capital expenditures
possibly in excess of $200 million, and redemption of the
$22.1 million of 7.70% senior notes (due January
15, 2004). The company had cash on hand of $216 million
as of Nov. 29, but the company requires $100 to $120
million of cash in the system to support day-to-day operations.
Over the longer term, capital investment must exceed depreciation
(currently about $280 million) for the company's stores to remain
appealing to customers.
The Great Atlantic & Pacific Tea Company, Inc.,
headquartered in Montvale, New Jersey, operates 645 supermarkets
in 10 states, the District of Columbia, and Ontario.
Revenue for the 12 months ending Nov. 2003 was $11.2
billion. The parent of the German supermarket chain Tengelmann
owns 57% of A&P.
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service