MOODY'S CONFIRMS RATINGS OF THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (SENIOR UNSECURED AT Ba1); OUTLOOK REMAINS NEGATIVE
Moody's Investors Service confirmed the ratings of The Great Atlantic & Pacific Tea Company, Inc. and assigned ratings to company's new multiple seniority shelf. The ratings of A&P are based upon the company's valuable supermarket franchise and the potential positive impact of its restructuring and strategic efforts. The ratings also incorporate A&P's modest profitability, weak debt protection measures and the negative impact to the company's operations of intense competition within its major trade areas. Rating outlook remains negative.
The Great Atlantic & Pacific Tea Company, Inc.:
Senior unsecured shelf at (P)Ba1
Subordinated shelf at (P)Ba3
Junior subordinated shelf at (P)B1
A&P Finance I, A&P Finance II, A&P Finance III:
Preferred trust securities at (P)"ba3"
The Great Atlantic & Pacific Tea Company, Inc.:
Senior unsecured bank credit facility, guaranteed by A&P's subsidiaries, at Baa3.
Senior unsecured notes at Ba1.
Senior unsecured shelf at (P) Ba1
Subordinated shelf at (P) Ba3
Preferred stock shelf at (P) "ba3".
The Great Atlantic & Pacific Tea Company Limited:
Senior unsecured bank credit facility, guaranteed by A&P and its subsidiaries, at Baa3.
Senior unsecured notes guaranteed by The Great Atlantic & Pacific Tea Company, Inc. at Ba1.
"Negative. The company's weak debt protection measures leave limited room for further erosion. If A&P's capital expenditure programs and strategic repositioning efforts do not result in improved cash flow and operating benefits in the intermediate term, the company's ratings could be lowered."
A&P has developed and swiftly executed a comprehensive strategy which focuses on the company's core trade areas and competencies. The company has closed 110 of the 132 under-performing stores identified for exit, including all the stores in Richmond, Virginia. A&P has also closed or sold its 34 stores in the Atlanta market. Savings from the elimination of the losses of the exited facilities and from consolidation of distribution, manufacturing and administrative functions will generate cost savings of $90 million p.a.by the year 2000. In addition, proceeds from asset sales and working capital liquidation is expected to range from about $50 to $80 million. These actions necessitated pre-tax charges of about $295 million in the fiscal year ending February 1999. Moody's believes that the disposition of loss-making operations is an operational positive, which will allow A&P to focus and build its more productive operations, and will have a positive impact on financial performance in the near term.
The company has also accelerated its store opening and remodeling programs, with planned capital expenditures of over $500 million in the current fiscal year. Much of this effort will be devoted to major trade areas and should eventually bolster market share and comparable store sales. Improved comparable store sales of 1.9% in fiscal year 1998 (versus 1997's -1.6%) are attributable to recent storing efforts and restructuring initiatives. However, higher current year capital expenditures may require incremental debt of about $200 million, exacerbating the company's high leverage and low coverages. Moody's expects that higher revenues from the upgraded store base and improved operating cash flow will somewhat compensate for higher funded debt levels. However, adjusted leverage remains high, coverages are weak and historical profit margins are thin.
A&P's new multiple seniority shelf may also be accessed by one of three issuer trusts, who will issue preferred trust securities thereunder. The only asset of the trusts will be an A&P debt issue which Moody's anticipates will be junior subordinated debt.
Headquartered in Montvale, New Jersey, The Great Atlantic & Pacific Tea Company, Inc. operates about 759 grocery retailing stores and serves 57 franchised stores.
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