MOODY'S UPGRADES DEBT OF FRED MEYER, INC. (SENIOR UNSECURED TO Baa3); RATES AT Baa3 NEW GUARANTEED SENIOR UNSECURED NOTES OF KROGER CO., TO BE ISSUED UNDER RULE 144A
Moody's Investors Service raised the ratings of Fred Meyer, Inc., concluding our review for possible upgrade. This action was based upon the guarantee of Fred Meyer's debt by parent Kroger Co.and material Kroger operating subsidiaries. Moody's also confirmed Kroger's existing ratings and assigned a rating to Kroger's new $750 million senior unsecured notes to be issued under Rule 144A. Kroger's ratings are based on the very significant operating strength, market share and geographic coverage of the merged entity, as well as the negative impact on the combined company's debt protection measures from Meyer's huge debt load.
Fred Meyer, Inc.:
Guaranteed senior notes, guaranteed senior secured bank revolving credit agreement and term loan agreement, and synthetic lease facilities to Baa3 from Ba2.
Shelf to (P)Baa3 from (P) Ba2.
The Kroger Co.:
Guaranteed senior unsecured notes to be issued under Rule 144A at Baa3.
The Kroger Co.:
Senior unsecured notes and certificates, bank credit facility, MTN program, and industrial revenue bonds, to be guaranteed by material operating subsidiaries, at Baa3.
Senior subordinated notes and debentures, to be guaranteed by material operating subsidiaries, at Ba2.
Senior unsecured shelf registration, to be guaranteed by material operating subsidiaries, at (P)Baa3
Senior subordinated and subordinated shelf, to be guaranteed by material operating subsidiaries, at (P)Ba2.
Preferred stock shelf, to be guaranteed by material operating subsidiaries, at (P) "ba2"
"Stable. Kroger is appropriately positioned at its current rating level. Kroger's debt protection measures remain appropriate for its rating levels, and Moody's expects improvement as financial benefits are realized from enhanced market share, improved leverage with vendors and synergistic cost savings upon the absorption of Fred Meyer."
Kroger completed its acquisition of Fred Meyer in May. By combining with Fred Meyer, Kroger has enhanced its considerable geographic diversity by entering the large and attractive West Coast market. The merged company has a number one or number two market share in 33 of the largest markets in the U.S., allowing it to achieve greater leverage with vendors and even better economies of scale. The expanded Kroger will be a much more formidable player in the fiercely competitive grocery industry.
In addition to greater clout, the merged company will have opportunities for synergistic cost savings, estimated at $225 million p.a. within three years. About $75 million of cost savings should be achieved in the first twelve months. The fact that Kroger and Fred Meyer have little current geographic overlap should ease the usual challenges of consolidation, as the merged company will not have to deal with many instances of duplication.
Kroger has assumed Fred Meyer's heavy debt load of about $5 billion. Moody's anticipates that the profitability and cash flow generation of the combined operations will allow rapid improvement in debt protection measures, which remain appropriate, however, for Kroger's rating levels.
A substantial portion of Kroger's operations are conducted by subsidiaries. The Kroger Co. and material subsidiaries (including Fred Meyer's subsidiaries) guarantee Fred Meyer's bank debt. Parent Kroger Co. and Fred Meyer subsidiaries guarantee Fred Meyer's public debt. Moody's expects that Kroger's non-Fred Meyer material subsidiaries will guarantee Fred Meyer's public debt; if guarantees from Kroger's non-Fred Meyer material subsidiaries are not forthcoming, the rating on Fred Meyer's public debt will likely be lowered.
The new unsecured senior notes of Kroger Co. will be sold in privately negotiated transactions without registration under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issue has been designed to permit resale under Rule 144A. The senior notes are guaranteed by Kroger's material operating subsidiaries, as are Kroger's bank facilities; Moody's believes that Kroger's material subsidiaries will guarantee Kroger's public debt forthwith.
Headquartered in Cincinnati, The Kroger Co. operates about 2206 supermarkets and multidepartment stores in 31 states, 799 convenience stores (including 113 franchised stores) and 383 fine jewelry stores.
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