NOTE: On January 28, 2021, the press release was corrected as follows: In the REGULATORY DISCLOSURES section, the hyperlink in the environmental, social and governance (ESG) risks paragraph was changed to
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406. Revised release follows.
New York, January 27, 2021 -- Moody's Investors Service, ("Moody's") today
affirmed PetSmart, Inc.'s ("PetSmart") corporate family rating
and probability of default rating at B2 and B2-PD respectively.
Additionally, Moody's assigned a B1 rating to its new proposed senior
secured term loan, a B1 rating to its new proposed senior secured
notes and a Caa1 rating to its new proposed senior unsecured notes.
The proceeds of the new proposed facilities will be used to refinance
existing debt. The outlook is changed to positive from stable.
The ratings are subject to completion of the transaction as proposed and
review of final documentation.
"The change in the outlook reflects the governance considerations particularly
its financial strategy associated with the company's significant
debt reduction through proceeds from the monetization of Chewy stock and
additional debt reduction from the expected $1.3 billion
in new equity contribution from the sponsors", Moody's
Vice President Mickey Chadha stated. "In addition,
the operating performance of the company has also been above expectations
especially during the coronavirus related disruptions and Moody's
therefore expects leverage to improve to below 4.5x in the next
12-18 months", Chadha further stated.
Affirmations:
..Issuer: PetSmart, Inc.
.... Probability of Default Rating,
Affirmed B2-PD
.... Corporate Family Rating, Affirmed
B2
Assignments:
..Issuer: PetSmart, Inc.
....Senior Secured Term Loan, Assigned
B1 (LGD3)
....Senior Secured Regular Bond/Debenture,
Assigned B1 (LGD3)
....Senior Unsecured Regular Bond/Debenture,
Assigned Caa1 (LGD5)
Outlook Actions:
..Issuer: PetSmart, Inc.
....Outlook, Changed To Positive From
Stable
RATINGS RATIONALE
PetSmart's B2 corporate family rating is supported by the company's very
good liquidity and its position as the largest specialty retailer of pet
products and services in the US. Although the company's leverage
is high, Moody's expects lease adjusted debt/EBITDA to be
below 4.5x in the next 12-18 months. PetSmart has
improved leverage significantly as the company has reduced debt through
the monetization of Chewy stock and improved EBITDA. For the LTM
period ended November 1, 2020 leverage was at 5.4x compared
to 7.1x at the end of fiscal 2019. Pro forma for the refinancing,
leverage will improve further to about 4.5x as the sponsors will
contribute about $1.3 billion in equity with proceeds used
to further reduce debt.
Chewy is currently a non-guarantor restricted subsidiary of PetSmart.
However, after the refinancing, Chewy will no longer be a
subsidiary of PetSmart but will become a sister company of PetSmart under
common ownership of a parent controlled by the sponsors. Therefore
post refinancing Chewy will provide no credit or liquidity support to
PetSmart other than a $4 billion Chewy common stock pledge as collateral
for PetSmart's new secured debt. The pledgor of the stock
collateral will also guarantee the secured and unsecured debt of PetSmart.
However, the stock collateral and the pledgor guarantee will fall
away if total net leverage is equal to or less than 2.00x.
Moody's views the transfer of Chewy's ownership stake as credit
negative and expects all future proceeds from monetization of Chewy stock
will go to the equity sponsors. Chewy currently has a market value
of about $42 billion which values PetSmart's current 62%
ownership of Chewy at about $26 billion. Governance remains
a key credit consideration given that PetSmart's financial strategies
will continue to be dictated by its private equity owners.
The pet products and services industry remains highly competitive with
increasing competition from the mass retailers including large chains
like Walmart, Target, and Kroger and pure play e-commerce
retailers like Amazon and Chewy. Despite the close to 300%
increase in omnichannel sales which include buy online pickup in store
(BOPIS), ship to home and ship from store, in the first three
quarters Moody's estimates the company's e-commerce
penetration remains low at less than 5%. However,
PetSmart has demonstrated the resilience of its business model as it very
successfully navigated the disruptions caused by the coronavirus pandemic
reporting comparable store sales growth of 8.4% for the
first nine months of fiscal 2020.
Other positive rating factors include PetSmart's well-known brand
and broad national footprint. The company's sizeable services offering
is a positive as it provides a defensible market position and is less
vulnerable to e-commerce. The pet products industry in general
remains relatively recession resilient, driven by factors such as
the replenishment nature of consumables and services and increased pet
ownership. Moody's expects the company to continue to report
comparable store sales growth in fiscal 2021 as its proprietary brands
and specialty offerings continue to resonate with customers.
The positive outlook reflects Moody's expectation that the current positive
operating trends will be sustained supporting further improvement in credit
metrics over the next 12 months, that PetSmart's financial strategies
will support a further reduction in leverage and that liquidity will remain
very good.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Sustained growth in revenue and profitability and continued free cash
flow generation while demonstrating conservative financial policies could
lead to a ratings upgrade. Quantitatively, ratings could
be upgraded if debt/EBITDA is sustained below 4.5 times and if
EBIT/interest expense is sustained above 2.5 times while maintaining
very good overall liquidity.
PetSmart's ratings could be downgraded if overall operating trends decline
or if operating margins erode, indicating that the company's industry
or competitive profile is weakening. Ratings could also be downgraded
if the company's financial policies were to become aggressive particularly
in terms of dividends and acquisitions or if liquidity deteriorates.
Quantitatively, a ratings downgrade could occur if debt/EBITDA does
not improve and remains above 5.75 times or EBIT/interest is sustained
below 1.5 times.
The term loan is expected to contain covenant flexibility for transactions
that could adversely affect lenders, including: incremental
facility capacity up to: (i) the greater of $952M and 0.75x
pro forma Consolidated EBITDA plus (ii) an unlimited amount subject to
(a) if secured by the collateral on a pari passu basis, 2.75x
first lien net leverage; (b) if secured by the collateral on a junior
priority basis, 3.25x senior secured net leverage; (c)
if unsecured, 3.75x total net leverage (or, if junior
secured or unsecured debt is incurred in connection with a permitted acquisition
or other investment, senior secured net leverage or total net leverage,
respectively not increasing). Collateral leakage is permitted through
the transfer of assets to unrestricted subsidiaries, there are no
additional "blocker" protections. Only wholly-owned
subsidiaries must provide guarantees raising the risk of guarantee release;
partial dividends of ownership interests could jeopardize guarantees.
There are no leverage-based step-downs to the requirement
that net asset sale proceeds prepay the loans or be reinvested.
PetSmart, Inc. is the largest specialty retailer of supplies,
food, and services for household pets in the U.S.
The company currently operates close to 1,650 stores in the U.S.
and Canada. Revenues total about $7.5 billion (excluding
Chewy). The company is owned by a consortium of sponsors including
BC Partners, Inc., La Caisse de dépôt
et placement du Québec, affiliates of GIC Special Investments
Pte Ltd, affiliates of StepStone Group LP, and Longview Asset
Management, LLC. PetSmart currently owns 62% of Chewy,
a leading online retailer of pet food and products in the United States.
However, post transaction PetSmart will not own Chewy.
The principal methodology used in these ratings was Retail Industry published
in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Manoj Chadha
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Margaret Taylor
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
