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Announcement:

Moody's affirms Safeway Ltd's A3 rating; outlook stable (UK)

06 Apr 2011

Paris, April 06, 2011 -- Moody's Investors Service has today affirmed the A3 senior unsecured rating assigned to the bonds issued by Safeway Limited ("Safeway") and guaranteed by Wm Morrison Supermarkets plc ("Morrisons" or "the company"). This rating action follows the company's recent announcement that it plans to increase its returns to shareholders, at the same time that it is accelerating its growth initiatives in the UK through opening new selling space and making acquisitions. The outlook on the rating is stable.

RATINGS RATIONALE

"Today's affirmation reflects Moody's expectation that the strategies pursued by the management of Morrisons -- which is keen to catch up with leading retailers and to expand to untapped formats such as internet grocery retailing and convenience stores -- will enhance the company's market position in the UK although it will translate into higher investments," says Yasmina Serghini-Douvin, a Moody's Assistant Vice President-Analyst. "In addition to Morrisons' capital expenditures, which Moody's expects to be approximately GBP2 billion over the next two years, the rating agency notes that the company has shown increased interest in acquisitions, as illustrated by its recent purchase of a 10% stake in FreshDirect and its acquisition of kiddicare.com," continues Ms Serghini-Douvin. "Furthermore, Morrisons has increased its returns to shareholders because it announced a two-year equity return of GBP1 billion and is committed to grow yearly dividends in the double-digit range over the next three years."

Whilst acknowledging Morrisons' steady increase in profitability and growth potential in the UK, where it is the fourth-largest grocery retailer, Moody's cautions that the industry remains fiercely competitive and that key rivals are improving their strategies and adding retail space across the country. The rating agency also cautions that these initiatives somewhat increase the complexity within the company, which has recently strengthened its management team across several functions to serve its various ongoing projects.

Importantly, whilst Morrisons has reiterated its commitment to a strong investment-grade balance sheet and exhibited strong credit metrics at fiscal year ending (FYE) 30 January 2011, Moody's expects these to weaken materially in the coming 18 months as the company takes on more debt to fund its projects. Moody's expects that, in FYE 30 January 2012, the company's ratios for adjusted (gross) debt/EBITDA and retained cash flow (RCF)/net debt will move above 2.0x and to the low 30s in percentage terms, respectively, compared with approximately 1.2x and 54% in FYE 30 January 2011 (based on preliminary figures).

Consequently, the company will consume the flexibility it has built over the past years in its rating category with the potential to stray away from our target metrics in FYE 30 January 2013 on the assumption that it executes its share buybacks and achieves its capex guidance. To the extent that Moody's is comfortable that this will represent a temporary position with credit metrics quickly recovering after January 2013 to the levels detailed in the rating guidance for the A3 rating when this two year plan is completed, then the current rating will be able to accommodate this dip.

On the other hand the rating and outlook could come under downward pressure if there were evidence that Morrisons' credit metrics were to diverge from the A3 rating, although the agency will accept for a limited period of time metrics such as debt/EBITDA ratio above 2.0x (but not exceeding 2.5x) and a RCF to net debt ratio in the mid-20s in percentage terms.

Moody's further notes that the projects that the company is implementing will require funding, beyond the new 5-year GBP1.2 billion revolving credit facility that it has recently contracted. The current rating and outlook assume that the company will raise additional resources to ensure a smooth execution of its strategy.

LAST RATING ACTION & PRINCIPAL METHODOLOGY

Moody's last rating action on Morrisons was implemented on 17 March 2009, when the rating agency upgraded to A3 from Baa1 the senior unsecured ratings on the bonds issued by Safeway.

The principal methodology used in rating Safeway was "Moody's Global Retail Industry Rating Methodology", published in December 2006 and available on www.moodys.com.

Wm Morrison Supermarkets plc, headquartered in Bradford, England, is the fourth-largest UK food retailer, with revenues of approximately GBP16.5 billion in FYE 30 January 2011.

Paris
Yasmina Serghini-Douvin
Asst Vice President - Analyst
Corporate Finance Group
Moody's France SAS
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Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's France SAS
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Moody's affirms Safeway Ltd's A3 rating; outlook stable (UK)
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