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31 Oct 2002
MOODY'S CONCLUDES REVIEW OF GREAT ATLANTIC & PACIFIC TEA CO. BY LOWERING ALL RATINGS ; OUTLOOK IS NEGATIVE
Approximately $1.2 Billion of Debt Affected.
New York, October 31, 2002 -- Moody's Investors Service lowered all ratings of The Great Atlantic &
Pacific Tea Company, Inc ("A&P") as follows:
$425 million secured revolving credit facility to Ba3 from Ba2,
$ 22 million of 7.70% senior notes (2004) to B3 from
$242 million of 7.75% senior notes (2007) to B3 from
$275 million of 9.125% senior notes (2011) to B3
$200 million of 9.375% senior notes (2039) to B3
Senior unsecured shelf to P(B3) from P(B2),
Subordinated shelf to P(Caa1) from P(B3),
Junior subordinated shelf to P(Caa1) from P(B3),
Preferred stock shelf to P(Caa2) from P(Caa1),
Preferred trust securities issued by A&P Finance I, A&P
Finance II, and A&P Finance III to P(Caa1) from P(B3),
Senior implied rating to B2 from B1, and the
Long term issuer rating to B3 from B2.
In spite of our opinion that the company has a reasonable amount of liquidity
at least for the intermediate term, the downgrade was prompted by
the long-term decline in the company's competitive position,
inability to make progress at improving weak operating margins,
and the continued negative free cash flow. The rating outlook is
negative. This concludes the review that commenced on August 5,
The ratings consider the company's leveraged financial condition,
substandard operating margins (in spite of the relatively high gross margins),
and the competitive nature of the supermarket industry. The weak
return on assets, which causes us to conclude that additional asset
rationalization may be necessary, and the historical inability to
improve operations or the balance sheet, in spite of strategy and
management changes, are also reflected in 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 investments also impact the ratings.
However, the relatively high gross margins (resulting from high
perimeter department sales), the company's decent liquidity position,
and incremental improvements in working capital efficiency benefit the
company. The ratings also recognize that the company has the #1
or #2 position in its four most important markets (Detroit,
New Orleans, the New York Metro area, and Toronto),
The negative outlook considers the possibility that ratings may decline
if the regions outside of Ontario and New York do not meaningfully contribute,
overall results are further affected by the heavy promotional activity
around New York, or return on assets does not improve. While
the company currently has decent liquidity, the necessity to make
significant additional drawings on the credit facility would impact Moody's
view of the risks facing the company. Besides a sustained improvement
in leverage, substantial improvements towards industry operating
norms will be important to progress up the rating scale.
The Ba3 rating on the secured revolving credit facility ($340 million
available to The Great Atlantic and Tea Company, Inc. and
$85 million available to The Great Atlantic & Pacific Company
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. The March 2002
amendment extended the maturity date to June 2005 and the October 2002
amendment relaxed the covenant for minimum fixed charge coverage.
Moody's believes that the lenders are well protected by collateral value
and the structure of the facility. We expect that much of the credit
facility will remain undrawn even during seasonal inventory peaks.
Moody's observes that the company had cash on hand of $146 million
and revolving credit availability of $255 million on September
7, 2002 and, with the most recent amendment, likely
will remain in compliance with all bank agreement covenants over the medium
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 issue
due in 2004, none of the company's bonds mature before 2007.
Moody's believes that A&P's gross margins of 28.5% in
the first 28 weeks of Fiscal 2003 were better than the supermarket industry
average, even though margins declined slightly from 28.8%
in the same period of Fiscal 2002 as supermarket marketing efforts intensified
(particularly around the New York Metro area). However, operating
margins are low, even for the low-margin supermarket industry.
In Moody's view, the company enjoys high gross margins due to the
relatively high proportion of perimeter department sales (ie. bakery,
deli, seafood) but operating margins fall below industry norms because
of sizable fixed costs (ie. labor) for many low-volume stores.
Calculations for the company's debt protection measures can significantly
vary, according to the treatment of special charges. In general,
Moody's considers the special charges at A&P to be an ongoing cost
of doing business since they have occurred every year for several years
and, in our opinion, circumstances may require additional
special charges in future periods. The company has taken about
$644 million in operating special charges over the past 4 1/2 years
(slightly offset by $61 million in extraordinary demutualization
income). If special charges and extraordinary income are not considered
part of operating cash flow, lease adjusted leverage has trended
over the past several years to 7.2 times in September 2002 from
4.0 times in February 1998. Going forward, Moody's
expects that the company's business plan for a relatively modest program
of new stores and major remodels will require the reinvestment of virtually
all cash flow from operations.
The company operates in several different regions of North America.
The regions around Detroit, New Orleans, Toronto, and
the New York Metro area provide about 80% of the company's revenues,
while almost all operating profit has historically come from the New York
Metro and Toronto regions. Over the past several quarters as the
economic slowdown has impacted several industries important to the New
York Metro economy, grocery retailer promotional activity has impacted
A&P's margins and cash flow. With four New York Metro area
competitors having similar market shares (ShopRite, A&P,
Pathmark (senior implied Ba3), and Stop & Shop (senior unsecured
of parent Ahold Baa1)), we expect that promotional activities designed
to maintain customer appeal will remain unusually intense even for the
highly competitive supermarket industry.
The Great Atlantic & Pacific Tea Company, Inc.,
headquartered in Montvale, New Jersey, operates 692 supermarkets
in 15 states, the District of Columbia, and Ontario under
the following trade names: A&P, Waldbaum's, The
Food Emporium, Super Foodmart, Super Fresh, Farmer Jack,
Kohl's, Sav-A-Center, Dominion, The Barn
Markets, Food Basics, and Ultra Food & Drug. The
parent of the German supermarket operator Tengelmann owns 57% of
Andris G. Kalnins
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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