MOODY'S ASSIGNS PRIME-2 SHORT-TERM RATING TO DILLARD'S, INC.
New York, 08-12-98 -- Moody's Investors Service assigned a short-term rating of Prime-2 to Dillard's, Inc. for its commercial paper program. The rating reflects the very significant increase in Dillard's debt as a result of the Mercantile Stores Company, Inc. acquisition and the consequent sharp deterioration in coverage and leverage measures. The rating also incorporates the good strategic fit of the acquisition, as well as Moody's expectation that that debt protection measures will improve as the combination generates incremental sales, cost savings and increased buying clout with vendors.
Commercial paper at Prime-2.
Senior unsecured bonds, debentures, notes, Reset Put Securities and issuer rating at Baa1.
Senior unsecured bank agreement at Baa1.
Subordinated deferrable interest debentures at Baa2.
Senior unsecured shelf at (P)Baa1.
Subordinated unsecured shelf at (P)Baa2.
Preferred stock shelf at (P)"baa2"
Dillard Investment Company, Inc.
Senior unsecured notes at Baa1.
Senior unsecured bank agreement at Baa1.
Commercial paper at Prime-2.
Dillard's Capital Trust I:
Trust preferred capital securities at "baa2"
Dillard's Capital Trust II, Dillard's Capital Trust III, Dillard's Capital Trust IV and Dillard's Capital Trust V:
Capital securities shelf at (P)"baa2"
Mercantile Stores Company, Inc.
Senior unsecured notes and debentures at Baa1.
"Stable. Dillard's is appropriately positioned at its current rating levels given the strategic fit of Mercantile and the combined company's strengthened market share in a consolidating industry, as well as the very high post-acquisition leverage. However, the current ratings assume that debtholder protection measures will improve as Mercantile is absorbed into Dillard's and as the larger company realizes synergistic cost savings and revenue opportunities."
Dillard's is buying Mercantile for $80 per share or about $2.9 billion in cash, in addition to the assumption of Mercantile's existing debt. The regulatory approval process has just been completed, and the acquisition is expected to occur this week. The combination of Dillard's and Mercantile is a strong strategic fit. Both are regional full-line department stores operating in the same general trade areas and targeting the same moderate and better customers. Both offer both national brands and private label merchandise. Both companies are historically stable, financially prudent, family-controlled businesses. Such common characteristics should ease the normal challenges of operational combination.
The absorption of Mercantile by Dillard's will bolster the merged company's market share in its trade areas. Greater clout with vendors, which could be seen as early as Fall 1999, along with administrative consolidation, should result in synergistic cost savings. However, this $2.9 billion cash acquisition will dramatically increase leverage. To reduce its very high post-acquisition debt level, the company plans to sell 26 stores to Proffitt's and May Department Stores. In addition, Dillard's and Belk, Inc. have signed a letter of intent to exchange 7 Mercantile stores for 9 Belk stores. After-tax proceeds from proposed asset sales will reduce debt by a not immaterial amount soon after the acquisition. Moody's anticipates that the improvement in debtholder protection measures over the intermediate term from asset sales, increased revenues and lower costs will quickly yield leverage and coverage measures which are consistent with the ratings.
Mercantile will be a subsidiary of Dillard's. Moody's expects that consolidated funded debt (with the exception of Mercantile's existing debt) will remain at Dillard's and DIC.
Dillard's commercial paper program is available to fund general corporate purposes, including financing of the Mercantile acquisition. Alternative liquidity for commercial paper is provided by the rated $750 million senior unsecured revolving credit maturing in May 2002, available to both Dillard's and DIC. Each borrower guarantees the borrowings of the other thereunder. A new $300 million bank revolving credit facility maturing in 364 days is expected to be executed soon, with terms similar to the existing bank credit. Moody's expects that unused and available committed bank credit facilities will fully cover outstanding commercial paper.
Dillard's, Inc., headquartered in Little Rock, operates 272 stores in 27 Southwest, Southeast, Mountain and Midwestern states. Mercantile Stores Company, Inc. has about 119 stores throughout 17 southern and midwestern states.
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