MOODY'S LOWERS RATINGS OF THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (SENIOR UNSECURED TO Ba1); ASSIGNS FIRST TIME RATING TO BANK AGREEMENT (SENIOR UNSECURED AT Baa3)
New York, 07-01-98 -- Moody's Investors Service lowered the debt ratings of The Great Atlantic & Pacific Tea Company, Inc. (senior unsecured to Ba1 from Baa3) based on the company's modest and declining profitability, weak debtholder protection measures, and the negative impact on A&P's operations from the intense competition within its major trade areas. The new rating level also reflects A&P's valuable supermarket franchise, aggressive capital expenditures to upgrade its storing and its stable debt levels. This downgrade completes the review begun on March 18, 1998. Moody's also assigned a first time rating of Baa3 to the company's guaranteed bank credit agreement.
The Great Atlantic & Pacific Tea Company, Inc.:
Senior unsecured notes to Ba1 from Baa3.
Unsecured multiple seniority shelf: senior debt to (P) Ba1 from (P) Baa3; subordinated debt to (P) Ba3 from (P) Ba2; and preferred stock to (P) "ba3" from (P) "ba2".
The Great Atlantic & Pacific Company of Canada, Limited:
Senior unsecured notes guaranteed by The Great Atlantic & Pacific Tea Company, Inc. to Ba1 from Baa3.
The Great Atlantic and Pacific Tea Company, Inc.
Senior unsecured bank credit facility, guaranteed by A&P's subsidiaries, at Baa3.
The Great Atlantic & Pacific Company of Canada, Limited
Senior unsecured bank credit facility, guaranteed by A&P and its subsidiaries, at Baa3.
"Negative. Moody's expects the company's weak debtholder protection measures to remain modest with the potential for further erosion, given the intense competition within the supermarket industry and the time needed for the benefits of the company's capital expenditure programs to be realized."
A&P is a collection of regional supermarket chains located throughout the Metro New York, Middle Atlantic, Midwest, South and Ontario markets. While apparently geographically diverse, revenues and earnings tend to be concentrated in the New York metropolitan area, Philadelphia, Baltimore/Washington, Michigan, Atlanta, New Orleans and Toronto markets. Many of these markets are low population growth trade areas and all of them are among the most competitive in the industry. While maintaining strong market shares in key regions such as Metro New York (22%), Metro Detroit (28% share), Philadelphia (11%), and Ontario (23%), intense competition and low food price inflation have resulted in negative comparable store sales (-0.5% in 1996 and -1.6% in 1997) and low and declining margins (operating profit down from 1.7% in 1996 to 1.5% in 1997). Waldbaum's on Long Island and Super Fresh in Philadelphia have been especially hard hit. Waldbaum's new management team is re-emphasizing perishables, upgrading stores and implementing a marketing strategy. Super Fresh continues to be confronted by the expansion of (non-union) competitors. While Super Fresh has an 11% share of the Philadelphia market, it trails the estimated 29% market share of the Acme division of American Stores (Baa2 senior unsecured). Competition is expected to remain fierce in A&P's operating environment, especially in Philadelphia, Atlanta and Metro New York. The Canadian operation, however, has sustained its turnaround and remains a solid performer. Net income in 1997 was thus a modest $63 million or 0.6% of sales,
The company has an aggressive capital program to upgrade and expand its storing. About 114 stores have been closed since the beginning of 1996, including 11 in the Carolina market and 24 which were subsequently converted to Food Basics. Capital expenditures of nearly $297 million in 1996 and over $267 million in 1997 brought the percentage of the U.S. store base which is new or remodeled in the past six years to an acceptable 50%. The capital budget for 1998 (about $300 million) will further upgrade storing. However, the full benefits of new and upgraded stores will not be immediately realized; A&P estimates that it takes 12-15 months for a new store to recover its opening costs and become profitable. A&P's real estate leases which are at low historical rents, especially in the Metro New York area, are valuable intangible assets.
Even though earnings have been modest, cash from operations funded capital expenditures in 1997, allowing debt to remain flat. Interest and fixed charge coverages, already weak for the company's previous rating, fell to 1.9 times and a low 1.5 times respectively, and adjusted debt to EBITDA is high at 5.8 times. Moody's expects the improvement in debtholder protection to be slow.
German retailer Tengelmann owns 54.67% of A&P. Moody's believes that Tengelmann has shown itself to be a long term, strategic investor in A&P and anticipates that Tengelmann will continue to allow A&P to execute its operational and financial plans. A&P is the only public portion of Tengelmann's holdings.
The $500 million revolving credit agreement dated as of June 10, 1997 is composed of two tranches: $465 million available to A&P and C$50 million available to A&P Canada. The facility matures in June 2002. A&P and significant subsidiaries guarantee the obligations of A&P Canada, and significant subsidiaries guarantee the obligations of A&P. The structural advantage of upstream guarantees warrants the one notch difference between the bank facility and senior unsecured debt.
Headquartered in Montvale, New Jersey, The Great Atlantic & Pacific Tea Company, Inc. operates about 936 grocery retailing stores and serves 52 franchised stores.
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