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Rating Action:

Moody's changes outlook on Ahold Delhaize's Baa2 rating to positive, affirms ratings

Global Credit Research - 27 Jul 2016

London, 27 July 2016 -- Moody's Investors Service, (Moody's) has today affirmed the Baa2 issuer rating and (P)Baa2 Euro Medium Term Note Program rating of food retailer Koninklijke Ahold Delhaize N.V. (Ahold Delhaize), and the Baa2 senior unsecured ratings of its 100%-owned and fully guaranteed subsidiary Ahold Finance U.S.A., LLC. Concurrently, Moody's has affirmed the Baa2 senior unsecured rating of Delhaize America, LLC., which is -- following the completion of the merger between Ahold and Delhaize -- a 100%-owned and fully guaranteed subsidiary of Ahold Delhaize.

Moody's also affirmed the Baa2 rating of Delhaize Group's EUR400 million bond due in February 2020, which was hived down to Delhaize Le Lion / De Leeuw B.V. (unrated), a 100% subsidiary of Ahold Delhaize, as it is guaranteed by Ahold Delhaize.

Moody's also affirmed the Baa2 senior unsecured ratings of Delhaize Group, which will be assumed by Ahold Delhaize.

Moody's notes that Ahold Delhaize's issuer rating is a continuation of the existing Ahold issuer rating, because Ahold -- now renamed Ahold Delhaize -- is the surviving entity post merger. Delhaize Group's (Delhaize) Baa2 long term issuer rating was withdrawn.

The outlook on the ratings was changed to positive from stable.

"Our decision to change the outlook on Ahold Delhaize's Baa2 ratings to positive reflects the completion of the merger on 24 July 2016 between Ahold and Delhaize, "says Sven Reinke, a Moody's Vice President -- Senior Credit Officer and lead analyst for Ahold Delhaize.

"The all-share merger is credit positive because it creates a leading food retailer in the Benelux, the eastern states of the US, and some parts of Eastern and South-eastern Europe with larger scale and improved competitive positions."

RATINGS RATIONALE

Today's rating affirmation and outlook change primarily reflects the completion of the merger between Ahold and Delhaize, which both companies' shareholders and all regulatory authorities approved with only relatively limited conditions. One of these conditions was the disposal of 86 U.S. stores, in order to comply with the requirements of the United States Federal Trade Commission. Ahold and Delhaize announced on 14 July 2016 that an agreement with buyers for the 86 stores was reached. However, the divestures only represent 4.1% of the Ahold and Delhaize companies' total combined U.S. store count and 3.2% of the Ahold and Delhaize companies' combined U.S. 2015 net sales.

The divestures do not change Moody's view that the merger is positive for the enlarged company's business profile, as the combination of Ahold and Delhaize creates a leading food retailer in the Benelux, the eastern states of the US, and some parts of Eastern and South-eastern Europe. The combination of the two businesses will result in a financially stronger player in a consolidating industry, where economies of scale and purchasing power are key success drivers.

The transaction's structure supports the combined entity's credit profile, as it is an all-share merger without incremental debt. Although Ahold has paid EUR1 billion via a capital repayment and a reverse stock split to its shareholders on 21 July 2016 as part of the merger agreement, it was fully funded with excess cash resources and did not require incremental debt.

Owing to the strong credit profile of both predecessors prior to the merger, the all-share transaction structure as well as Ahold's strong operating performance in Q1 2016 and Delhaize's improving operating performance in H1 2016, the pro-forma financial profile of Ahold Delhaize is strong for the Baa2 rating category. For instance, the company's pro forma adjusted gross debt/EBITDA ratio for the last 12 months per Q1 2016 stood at 3.0x and its retained cash flow/net debt ratio was 31.8%. The EUR1 billion capital repayment and a reverse stock split lowers the ratio only by around 2.7%.

Ahold Delhaize's Baa2 rating is underpinned by its general resilience as a food retailer and the cash flow stability this brings, as well as the strength and leadership positions of the company's banners, especially in the Benelux and the eastern states of the US. Moody's expects that Ahold Delhaize will continue to generate significant free cash flows over the next 12-18 months despite EUR350 million of projected merger-related one-off costs.

Ahold's operating performance remained strong during the first three months of fiscal 2016, with (1) a 14.7% increase in underlying operating income (at constant exchange rates) to EUR449 million from EUR390 million in Q1 2015; and (2) materially higher operating cash flow from continuing operations of EUR563 million versus EUR430 million in Q1 2015. The strong operating performance was driven by identical sales growth of 0.8% (excluding gas) in the US and 2.9% in the Netherlands.

Delhaize's operating performance during the first six months of fiscal 2016 improved as well, with a 18.2% increase in underlying operating profit (at constant exchange rates) to EUR468 million from EUR396 million in H1 2015. The materially stronger operating profit was achieved on the back of comparable store sales growth of 2.7% in the US, 2.5% in Belgium and 9.7% in South-eastern Europe, as well as cost savings from the Belgium Transformation Plan.

Ahold Delhaize's liquidity is strong with combined cash and cash equivalents of EUR3,344 million at the end of Q1 2016 -- EUR2,344 million post the Ahold EUR1 billion capital repayment and reverse stock split - and an undrawn EUR1.0 billion committed credit facility that matures in 2021. The company's debt maturity profile is well balanced and debt maturities over the next 18 months are very low. In addition, we expect strong free cash flow generation of at least EUR750 million in 2017 excluding any potential shareholder remunerations beyond the ordinary dividend payment.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive outlook reflects that Ahold Delhaize's financial profile is strong for the rating category. It also reflects that a successful integration of the two predecessors' operations, alongside the realisation over three years of the targeted EUR500 million run-rate merger synergies, could further enhance the company's key credit metrics over the next 12-18 months.

Whilst Ahold Delhaize's strong operating cash flow generation would enable the company to further improve its financial profile, its relatively shareholder-friendly financial policy -- which was essentially assumed from Ahold - could limit the upside potential for its ratings.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive rating pressure could be exerted on Ahold Delhaize's rating if, after successful integration of Delhaize, the company's adjusted gross leverage were to remain below 3.25x, and its retained cash flow/net debt were to remain at least at 25%. The company would also need to exhibit continued prudence in exercising its shareholder return initiatives and a continued strong liquidity profile.

Conversely, the rating or outlook could come under negative pressure if operating underperformance or material debt-financed shareholder returns were to push Ahold Delhaize's adjusted leverage above 3.75x, or its retained cash flow/net debt below 20%.

Moody's has withdrawn the rating for its own business reasons. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

PRINCIPAL METHODOLOGY

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.

Koninklijke Ahold Delhaize NV was created by the merger between Ahold and Delhaize on 24 July 2016. The enlarged group is a leading food retailer, with total fiscal year 2015 (for the fiscal year ended 03 January 2016) pro forma revenues of EUR62.6 billion. Ahold Delhaize has strong positions in the Benelux, in the east of the US, in the Czech Republic, and in South-eastern European markets of Serbia, Romania and Greece.

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 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.

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.

Sven Reinke
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Marina Albo
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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