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Rating Action:

MOODY'S UPGRADES THE RATING OF SAFEWAY PLC BONDS TO A3. STABLE OUTLOOK.

08 Nov 2004
MOODY'S UPGRADES THE RATING OF SAFEWAY PLC BONDS TO A3. STABLE OUTLOOK.

Approximately GBP 950mm of long term debt instruments affected.

London, 08 November 2004 -- Moody's Investors service has today upgraded the senior unsecured rating assigned to the bonds issued by Safeway plc ('Safeway') to A3. The outlook is stable. This upgrade concludes the rating review initiated on 9 January 2003.

Today's rating action reflects the decision of Wm Morrison Supermarkets plc ('Morrisons') to put in place guarantees that will ensure that the claims of Safeway bondholders will rank pari-passu with those of lenders to Wm Morrison Supermarkets plc. It also reflects the rating agency's understanding that the guarantees have been executed as an amendment to the existing trust deeds for the legacy Safeway rated debt for both the four outstanding issues of Euro Medium-Term Notes and the one Eurobond issue.

The confirmation additionally factors the following:

(i) The scale of the merged Morrisons / Safeway business in the context of the UK food retail sector.

(ii) Moody's expectation that the financial metrics for the consolidated Morrisons group should position the company solidly in the A3 rating category by the end of financial year 2004/5. The rating agency anticipates that adjusted RCF / net adjusted debt should be in the 23%-27% range, with total cover and pension- and lease-adjusted debt / EBITDAR in the 5-6x and 2.5-2.3x ranges, respectively. Moody's noted that, prima facie, the company's expected credit metrics at FYE January 2005 may support a higher rating category. However, today's upgrade to A3 factors in the agency's view that the Morrisons business is in a period of significant transition and the execution risk associated with the company's various initiatives will remain significant over the next 18 months.

(iii) The solid operating performance of Morrisons supermarkets business over recent years and the progress it is making in its plan to convert the legacy Safeway stores into the Morrisons format. Evidence from the first 41 conversions is encouraging and indicates that the Morrisons business model and offer have the necessary appeal to increase the average basket size of the Safeway estate to levels in line with the existing Morrisons estate.

In this context, Moody's noted Morrisons indication that it will accelerate the store conversion programme, which, given the very weak like-for-like sales statistics in the Safeway's stores over the past 30 weeks, should reduce the risk of the weak performance of the Safeway's business weighing on the Morrisons group over the medium term. However, this programme remains in its early stages and conversion of the larger-format Safeway stores will take a little over a year to complete. The agency considers management's decision to accelerate the store conversion programme to be appropriate but at the same time ambitious, especially in light of the other challenges that management faces in driving out reductions in the operating cost base, integrating the two business supply and distribution networks into a single network and continuing with its store opening programme for the Morrisons business.

(iv) Morrisons historically conservative financial policy and its focus on debt reduction.

(v) The weak but stabilised performance of the legacy unconverted Safeway stores business. The agency noted that the negative like-for-like sales (excluding petrol) in the first 10 weeks of the second half of FYE Jan 2005 were flat compared with the first half of the year. Moody's believes that management's recent decision to roll out price reductions across the legacy Safeway store estate has on the one hand helped to arrest the rate of decline in volume sales but at the same time impacted average basket sizes.

(v) Morrisons success in executing the majority of the 52 disposals required by the Office of Fair Trading (OFT) and the expectation that the proceeds from these disposals will generate GBP720 million (including GBP212 million already raised in the first half of the 2004/5 year), which will be used in debt reduction. Moody's also noted that Morrisons has agreed to sell 114 of the smaller Safeway stores (less than 15,000 sq ft) to Somerfield and Robert Tchenguiz for a combined consideration of GBP260 million, which the agency expects to be used for debt reduction. Of the 114 stores sold 63 went to Somerfield ( mainly leasehold stores ) , the balance of 51 ( mainly freehold stores ) were sold to Northwharf Investments , a joint venture between Barclays Bank and Mr Tchenguiz. The sale of the leasehold stores is expected to lead to a meaningful reduction in Morrisons operating lease rental commitments.

(vi) Moody's opinion that Morrisons liquidity profile is solid -- supported by the company's significant freely available cash balances, the agency's expectation of modest free cash-flow generation over the next 12 months and the lack of any significant debt maturities falling due within the next 18 months. The liquidity profile is augmented by the company's access to a GBP1 billion five-year revolving credit facility (maturing in 2008). Moody's considers the headroom under the two financial covenants contained in the bank facility (Net debt : EBITDA and Net Interest + Operating lease rental payments / EBITDAR) to be comfortable and expected to improve.

The stable outlook factors Moody's view that the company will continue to make progress in executing its store conversion programme and that the integration of the two businesses will be substantially completed over the next 18 months. It also reflects the agency's expectation that the company will continue to use excess operating cash-flows and proceeds from disposals to reduce debt and, in so doing, improve its overall financial profile.

The following debt instruments are affected by today's rating action:

Safeway plc bonds:

Euro Medium-Term Notes: GBP250 million due August 2007, EUR250 million due April 2010, GBP150 million due August 2014 and GBP200 million due January 2017.

Eurobonds: GBP200 million due December 2018

Wm Morrison Supermarkets plc, headquartered in Bradford, England, is a leading UK food retailer. The company had revenues of GBP4.9 billion during the year ended January 2004. In March 2004 it acquired Safeway plc, which reported revenues of GBP7.9 billion for the 11 months to 7 March 2004.

Paris
Eric de Bodard
Managing Director
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Andrew B. Canwell
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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