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Rating Action:

MOODY'S ASSIGNS Ba3 TO INGLES MARKET'S $100 MM SR SUB ADD-ON, CONFIRMS OTHER RATINGS, REVISES OUTLOOK TO NEGATIVE

19 May 2003
MOODY'S ASSIGNS Ba3 TO INGLES MARKET'S $100 MM SR SUB ADD-ON, CONFIRMS OTHER RATINGS, REVISES OUTLOOK TO NEGATIVE Moody's Investors Service assigned a Ba3 rating to the proposed $100.0 million add-on to the $249.8 million 8.875% senior subordinated note issue (2011) of Ingles Markets, Inc ("Ingles"), confirmed all other ratings, and revised the rating outlook to negative. Proceeds from the issue will be used to pay down bank debt and to provide investment capital. Revision of the outlook to negative is prompted by (1) the failure to improve financial ratios that are already weak for current rating levels and (2) Moody's opinion that improvement of debt protection measures will prove challenging as long as the company continues to run free cash flow deficits (after capital investment and dividends). Nevertheless, the rating confirmation is based on (1) Moody’s belief that the fair market value of Ingles' large real estate portfolio substantially exceeds the company’s total debt balance and (2) Ingles' success at maintaining market share and margins, in spite of the recent competition from many new stores.



The rating assigned is:

- $100.0 million add-on to the 8.875% senior subordinated notes (2011) at Ba3.

Ratings confirmed are:

- $249.8 million of 8.875% senior subordinated notes (2011) at Ba3,

- Senior implied rating at Ba2, and the

- Long-term issuer rating at Ba3.

The rating outlook is revised to negative from stable.



The ratings recognize Ingles' need to periodically cover its cash flow deficit with additional capital because of the company's policies of owning most real estate and paying a high dividend. The increasing importance in the Southeast of non-traditional grocery retailers such as Wal-Mart and the company’s exposure to the economic fortunes of a relatively small geographic region (primarily the western halves of the Carolinas plus contiguous regions of adjacent states) also adversely impact Moody’s opinion of the risks facing Ingles.



However, the ratings consider Moody’s understanding that the fair market value of Ingles' unencumbered real estate substantially exceeds book value, Moody's belief that the long-term stability of the company's strategy with respect to operations, leverage, and liquidity will not change during the transition to a second generation of ownership (since the Ingle family maintains a controlling equity interest), and our expectation that the owned real estate could provide liquidity. Ratings also benefit from the company's position as an important regional player in the fast-growing southeastern United States and its track record of maintaining market share and operating margins, in spite of additional competition and the economic slowdown.



The negative outlook reflects Moody's opinion that current rating levels provide little cushion for deterioration in fixed charge coverage or financial leverage. If cash outflows for dividends and capital investment prompt leverage increases, the current level of operating performance falters, or returns on new stores fall below expectations, then the ratings would be adjusted downward. However, the ratings likely would remain at current levels over the medium term if the company maintains its current level of operating performance and uses some cash flow to improve the balance sheet.



The Ba3 rating on the senior subordinated notes considers that this debt is contractually subordinated to significant amounts of more senior obligations. Ingles Markets, Inc., which directly owns virtually all assets and runs virtually all operations except for the non-guarantor dairy subsidiary, is the note issuer. The more senior claims are principally comprised of $279 million of mortgages and other secured loans, six bilateral unsecured credit lines totaling $145 million, and $130 million of accounts payable. Given that about half of the company's real estate is unencumbered and our belief that real estate fair market value substantially exceeds net book value, Moody's expects that the senior subordinated notes would achieve high recovery in a distressed scenario.



For the twelve months ending March 29, 2003, lease adjusted debt to EBITDAR was about 5.8 times and fixed charge coverage was around 1.3 times. Both ratios are quite weak for the rating category. However, Ingles' EBITDAR margin of 8.2% was superior to many other regional supermarket companies and the company owns a larger than typical proportion of its store sites. In recent years, leverage at the company has trended upwards. In Moody's opinion, debt protection measures likely will not meaningfully improve over the medium term as the company funds the cash outflows for substantial real estate purchases and dividend payments.



Ingles directly confronts several respected grocery retailers in its trade areas. Competitors in various markets include Kroger (senior unsecured Baa3), Publix, Bi-Lo (senior unsecured rating of parent Ahold B1), Food Lion (senior implied rating of parent Delhaize Ba1), and Wal-Mart (senior unsecured Aa2). Over the previous 18 months, Wal-Mart has opened about 45 supercenters in trade areas where Ingles operates. Moody’s anticipates that competitors will continue opening stores as the regional population and economy grows, but that Ingles will stay relevant due to its strong regional market position and demonstrated ability to respond to new competition.



Ingles Markets Inc., headquartered in Asheville, North Carolina, operates 200 supermarkets principally in North Carolina, South Carolina, Georgia, and Tennessee. Revenue for the 12 months ending March 2003 approximated $1.95 billion.
No Related Data.
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