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Rating Action:

Moody's assigns Ba2 rating to Albertsons new Term Loan; New notes rated B3

Global Credit Research - 23 May 2016

New York, May 23, 2016 -- Moody's Investors Service, ("Moody's") today assigned a Ba2 rating to Albertsons Companies, LLC's ("ACL") new proposed $1.5 billion Term Loan and B3 rating to the company's new proposed $1.25 billion senior unsecured notes. Moody's also upgraded the rating of the company's existing senior secured term loans maturing 2021 to Ba2 from Ba3 and downgraded the Safeway, Inc. legacy notes to B3 from B2. All other ratings including the company's B1 Corporate Family Rating and B1-PD Probability of Default rating are affirmed. The rating outlook remains stable.

The proceeds of the new Term Loan and the new notes will be used to refinance the company's second lien notes maturing 2022 and the senior secured term loans maturing in 2019.

All ratings are subject to the completion of the proposed transaction and satisfactory review of documentation.

"Although the company has outperformed expectations, its credit metrics remain weak with debt to EBITDA adjusted for leases and pension liabilities at about 7.5 times at the end of fiscal 2015. However, we expect momentum in same store sales growth and cost efficiencies to continue to boost profitability resulting in improved credit metrics with debt to EBITDA expected to be approach 6.0 times in the next 12-18 months", Moody's Vice President and Senior Credit Officer Mickey Chadha stated. "Although the integration of the Safeway acquisition still has execution and integration risks, management continues to execute well and the combined company is the second largest supermarket chain in the U.S. with significant opportunities to create synergies and supply chain efficiencies that could further enhance profitability and top line growth", Chadha further added.

The following ratings are assigned:

Proposed new $1.5 billion senior secured term loan maturing 2023 at Ba2 (LGD2)

Proposed new $1.25 billion senior unsecured notes maturing 2024 at B3 (LGD5)

The following ratings are affirmed:

Albertsons Companies, LLC

Corporate Family Rating at B1

Probability of Default Rating at B1-PD

The following ratings are affirmed and will be withdrawn upon closing:

Albertson's Holdings LLC

Second lien notes maturing 2022 at B2 (LGD4)

Senior secured term loans maturing 2019 at Ba3 (LGD2)

The following ratings are upgraded and LGD assessment updated:

Albertson's Holdings LLC

Senior secured term loans maturing 2021 at Ba2 (LGD2) from Ba3 (LGD2)

The following ratings are downgraded and LGD assessment updated:

Safeway Inc. legacy notes maturing 2016, 2017, 2019, 2020, 2021, 2027 and 2031 at B3 (LGD5) from B2 (LGD4)

RATINGS RATIONALE

The B1 Corporate Family Rating of Albertsons Companies, LLC reflects the company's very good liquidity, its sizable scale and its well established regional brands. Safeway has a good store base with over ninety percent of its stores converted to the Lifestyle format with modest capital expenditures required for their maintenance. The store base also consists of stores acquired from Supervalu in 2013 with prolonged underperformance under previous ownership. The company also acquired 73 A&P stores and 35 Haggen stores in fiscal 2015 with 29 more Haggen stores to be acquired in the first half of fiscal 2016. Management has vast experience in the food retailing space and has demonstrated its ability to turnaround underperforming assets and the ratings reflect Moody's expectation that operating performance of all banners will continue to improve as price investments lead to increased traffic and volume. The initiatives undertaken by management have already proven successful in stabilizing and improving the operating performance of the company's stores. In 2015 identical store sales grew 4.8% for the consolidated company and identical store sales growth has been positive for the last 11 quarters. Operating efficiencies and strategic initiatives to minimize costs are also expected to reduce expenses and improve cash flow generation and enhance profitability with the company using excess free cash flow to pay down debt. Realized synergies for fiscal 2015 have exceeded expectations by about 30% and proceeds of about $350 million expected from the sale of some non-core assets are also expected to be used to reduce debt. Integration and execution challenges related to the Safeway acquisition, coupled with a high debt burden and risk associated with ownership by a financial sponsor, remain major risks for the company.

The proposed transaction will further simplify the company's capital structure creating a first lien secured and unsecured capital structure. The upgrade of the existing senior secured term loans to Ba2 and the Ba2 rating of the new term loan is the result of the larger amount of junior capital in the capital structure as the refinancing of the company's $610 million senior secured notes maturing 2022 will also result in the removal of guarantees and release of all collateral currently securing the Safeway legacy notes. The term loans also have very good collateral coverage as assets securing the term loans include the company's real estate portfolio with an appraised market value in excess of the outstanding term loans. The senior unsecured notes along with our approximately $6.2 billion adjustment for Multi-employer pension plan liabilities also provide a significant amount of junior capital providing support to the senior secured credit facilities in Moody's Loss Given Default model.

Currently the Safeway legacy notes maturing in 2016 ($80 million), 2017 ($100 million) and 2019 ($269 million) are guaranteed by ACL and its subsidiaries that guarantee the 2022 notes and is secured on a pari passu basis with the 2022 notes by all of the collateral that secures the 2022 Notes . The Safeway legacy notes maturing in 2020 ($137 million), 2021 ($130 million), 2027 ($150 million) and 2031 ($600 million) are not guaranteed and are currently secured on a pari passu basis with the 2022 notes only to the extent of certain of the collateral owned by Safeway and its subsidiaries.

The Safeway legacy notes are therefore downgraded to B3 from B2 as they along with the $1,776 million unsecured New Albertsons Inc. notes (unrated) will now be unsecured and non-guaranteed and therefore the junior most debt in the pro forma capital structure.

Although the new senior unsecured notes will be guaranteed by all wholly owned subsidiaries of ACL and therefore will be structurally senior to the Safeway legacy notes their B3 rating is the same as the Safeway legacy notes. This reflects the significant amount of senior capital ahead of these notes These notes are junior to the $4 billion ABL (which had a borrowing base of about $3.7 billion at February 27, 2016), about $6.5 billion in senior secured term loans and a significant amount of senior priority trade payables in Moody's Loss Given Default model.

The company's stable rating outlook incorporates Moody's expectation that identical store sales will continue to be positive and EBIT margins will continue to improve and the company's credit metrics will improve through increased EBITDA generation and debt prepayments.

Ratings could be upgraded if debt/EBITDA approaches 5.0 times, EBIT/interest is sustained above 1.75 times, financial policies remain benign and liquidity remains very good.

Ratings could be downgraded if debt/EBITDA is sustained above 6.25 times or EBIT/interest is sustained below 1.5 times. Ratings could also be downgraded if financial policies become aggressive or if liquidity deteriorates or if the integration of the acquired Safeway stores does not result in expected synergies and improvement in overall profitability of the combined company.

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Albertsons Companies, LLC is owned by a consortium led by Cerberus Capital Management and is the parent of Safeway Inc., Albertson's LLC and New Albertsons Inc. The combined company operates 2,271 grocery stores in 33 States under 18 banners including Safeway, Albertsons, Vons Jewel Osco, Shaw's, United Supermarkets, Acme, Star, Carrs, Randalls, Pavilions, Market Street, Tom Thumb, and Amigos. Revenues of the combined company will be about $59 billion.

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.

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: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Hofferber, CFA
MD - Corporate Finance
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 Ba2 rating to Albertsons new Term Loan; New notes rated B3
No Related Data.
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