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Rating Action:

Moody's assigns B1 Corporate Family Rating to Hudson's Bay Company

Global Credit Research - 20 Sep 2013

Approximately $1.9 billion of rated debt affected

New York, September 20, 2013 -- Moody's Investors Service today assigned a B1 Corporate Family Rating and a B1-PD Probability of Default Rating to Hudson's Bay Company ("HBC"). Moody's also assigned a B1 rating to the proposed $1.9 billion secured term loan due 2020 as well as a SGL-2 Speculative Grade Liquidity rating. The rating outlook is stable. The ratings assigned are subject to receipt and review of final loan documentation.

HBC entered into a definitive agreement to acquire Saks, Inc. ("Saks" -- Ba2/Review for Downgrade) for approximately US$2.9 billion including debt. Proceeds from the new term loan, along with drawings under asset based revolving credit facilities in the US and Canada, US$1 billion in common equity and an expected offering of US$400 million of senior unsecured notes will be used to fund the purchase price of Saks, to refinance certain existing debt of Saks and HBC, and to pay fees and expenses.

Moody's is concurrently withdrawing all existing ratings of Lord & Taylor Holdings, LLC, a wholly owned subsidiary of HBC, following the repayment of its previously rated debt.

The following ratings were assigned:

Hudson's Bay Company

Corporate Family Rating at B1

Probability of Default Rating at B1-PD

Speculative Grade Liquidity Rating at SGL-2

$1.9 billion Senior Secured Term Loan B due 2020 at B1 (LGD 4, 57%)

The following ratings were withdrawn:

Lord & Taylor Holdings, LLC:

Corporate Family Rating at B1

Probability of Default Rating at B1-PD

Senior secured bank term loan at Ba3

RATINGS RATIONALE

The B1 Corporate Family Rating assigned to HBC reflects the company's meaningful debt burden following the acquisition of Saks --proforma debt/EBITDA is estimated to be around 6.4 times (improving to near six times pro-forma for prospective cost savings if fully achieved). The ratings also considers the integration risk associated with this acquisition, which increases HBC's existing revenues by around 80%, and that Saks' luxury business is a new segment for HBC. The company's US operations -- which will represent around 60% of total sales --also have a significant geographic concentration in the Northeastern US, with Lord & Taylor primarily operating in this area which also includes Saks NY flagship store. The company's high leverage is mitigated by its sizable owned real estate holdings across all 3 banners, a substantial portion of which is unpledged. The ratings also take into consideration the improved operating performance of Hudson's Bay and Lord & Taylor under current management, which has shown generally consistent trends in same store sales and margins over the past few years. The ratings also take into consideration the diversification of the company across the US and Canada and with 3 distinct brands.

The stable rating outlook reflects our expectation the company will manage the integration of Saks without significant disruption, and substantially achieve targeted cost synergies over the next three years. We expect the combined firm will primarily utilize cash flow to support investments in its business -- including but not limited to store remodels, omnichannel initiatives and the rollout of Saks into Canada -- rather than to reduce funded debt. We expect the company's financial policies to remain supportive of creditor interests, and that any possible actions the company may take with respect to its sizable real estate holdings will be essentially neutral to credit metrics.

The B1 rating assigned to the proposed secured term loan reflects its second-lien position on the company's accounts receivable and inventory (the company's C$750 million and US$950 million asset based revolvers will have a first lien on these assets in Canada and the US) and the modest level of junior capital from the company's expected offering of $400 million of senior unsecured notes. The term loan B will have a first lien on all other assets of the company in the US and Canada. The term loan will not have any security interest in the company's owned real estate and the legal entities which own the real estate will not guarantee payment of the secured term loan. The secured term loan lenders will benefit from a pledge of the stock of the real estate owning entities.

In view of the company's high leverage and integration risk, ratings are unlikely to be upgraded in the near term. Over time ratings could be upgraded if the company makes sustained progress with the integration of Saks and is successful with growth initiatives at Hudson's Bay and Lord & Taylor, which would be evidenced by continued modestly positive revenue growth and improved operating margins on a consolidated basis. Quantitatively ratings could be upgraded if debt/EBITDA was sustained below 5 times and interest coverage was sustained above 2.0 times while maintaining a good overall liquidity profile.

In view of the high initial leverage and integration challenges, there is limited capacity for the company's financial policies to become more aggressive, for example, if actions with its sizable real estate portfolio were not supportive of creditor interests. Ratings could be downgraded if the competitive profile of the company weakened. For example, if integration challenges with Saks led to revenue declines or if greater competition in the Canadian market led to reversal of recent positive trends at Hudson's Bay. Ratings could also be lowered if there were any meaningful erosion in the company's good overall liquidity profile. Quantitatively ratings could be downgraded if debt/EBITDA was expected to remain above 6.5 times for an extended period or interest coverage approached 1.25 times.

Headquartered in Toronto, Canada, Hudson's Bay Company ("HBC") operates Hudson's Bay, Canada's largest branded department store with 90 locations, and Home Outfitters, Canada's largest home specialty superstore with 69 locations across the country. In the United States, HBC operates Lord & Taylor, a department store with 48 full-line store locations throughout the northeastern United States and in two major cities in the Midwest, and lordandtaylor.com. The company has agreed to acquire Saks, Inc. ("Saks") who currently operates 41 Saks Fifth Avenue stores, 69 Saks Fifth Avenue OFF 5TH stores, and saks.com. Fiscal 2012 revenues for HBC and Saks were C$4.1 billion and US$3.1 billion, respectively.

The principal methodology used in this rating was the Global Retail Industry Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Scott Tuhy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Ann Hofferber
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns B1 Corporate Family Rating to Hudson's Bay Company
No Related Data.

 

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