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Rating Action:

Moody's changes outlook on Delhaize's Baa3 rating to positive; affirms ratings

17 Jun 2015

London, 17 June 2015 -- Moody's Investors Service has today affirmed Baa3 long term issuer and senior unsecured ratings of Delhaize Group (Delhaize or the company) and the Baa3 senior unsecured rating of its affiliate Delhaize American, LLC. The outlook was changed to positive.

"Our decision to change the outlook on Delhaize's Baa3 ratings to positive reflects the reduction in adjusted debt, following revisions to the way we capitalize operating leases," says Sven Reinke, a Moody's Vice President -- Senior Analyst and lead analyst for Delhaize. "It also considers the strengthening of Delhaize's key credit metrics, despite deteriorating performance in its Belgium operations reducing EBITDA generation in 2014."

Moody's updated approach on standard adjustments for operating leases is explained in the cross-sector rating methodology "Financial Statement Adjustments in the Analysis of Non-Financial Corporations", published on 15 June 2015.

https://www.moodys.com/research/Moodys-updates-its-global-methodology-for-financial-statement-adjustments--PR_327853

RATINGS RATIONALE

Today's rating action reflects significant improvements to Delhaize's key credit metrics following the changes to Moody's approach for standard adjustments for operating leases lease. For example, Delhaize's lease adjusted gross debt/EBITDA ratio was 2.8x and its retained cash flow/net debt ratio was 32.7% in the 12-month period through Q1 2015, when considering the revised methodology.

Moody's notes that Delhaize's adjusted gross debt/EBITDA would have fallen slightly in Q1 2015 without the impact of the changes to the lease adjustments, owing to a EUR397 million debt reduction associated with the tender offer for bonds due in 2017 and 2019.

Delhaize reported a relatively strong top-line performance in 2014, with a 2.6% year-over-year increase at constant exchange rates and 2.5% at actual exchange rates (both excluding the 53rd trading week). Delhaize America posted the largest revenue growth of the three geographic regions the company operates in, with organic revenue growth excluding calendar effects of 4.5%, out of which 4.4% relates to same-store sales growth. Delhaize achieved strong sales performance in the US in 2014, with its focus on price investments at the Food Lion banner resulting in a mild increase in operating profit but a slight reduction in underlying operating profit margin (excluding the 53rd sales week) to 3.9% from 4.0% a year earlier.

However, Delhaize has been under pressure in its home market of Belgium for some time as ascendant discounters gain market share from the company, eating into its sales and operating margins. Delhaize's operating performance in Belgium deteriorated significantly in 2014 as indicated by the underlying operating margin falling to 2.4% from 3.9% a year earlier as a result of price investments, deflation in fruit and vegetable offerings, and disruptions related to the transformation plan (announced in June 2014), namely strikes and stores which faced high levels of out-of-stocks.

In February 2015, Delhaize agreed with the unions a restructuring plan of its Belgium operations that contains amongst other things (1) the collective dismissal of 1,800 employees through voluntary early retirement and voluntary leave, (2) the discontinuation of company operated activities in 10 supermarkets with unsustainable financial performance, (3) the modification of wage measures and benefits for all employees, and (4) a new competitive collective labour agreement for new joiners and a new store organisation. Delhaize expects to achieve at least EUR80 million of annual savings from 2018 and booked one-off charges of EUR137 million in 2014 related to the transformation plan.

Delhaize's Baa3 long-term issuer and senior unsecured ratings are underpinned by: (1) the company's fairly stable free cash flow generation, (2) leading position in its key markets, (3) disciplined capital expenditures and working capital management, and (4) its conservative financial policy. Furthermore, Delhaize's exhibits a strong liquidity profile and a comfortable debt amortisation scheduled with no major debt repayments until 2017. The rating, however, also reflects the weaker underlying operating performance in 2014 that is mainly related to the challenging trading environment in Belgium and some degree of uncertainty with regard to the impact of a potential exit from the Euro on the company's operations in Greece.

Moody's notes that Delhaize has confirmed that it has entered into preliminary discussions with Koninklijke Ahold N.V. (Baa3 review for upgrade) to explore the opportunity of combining the two companies. A potential combination of Delhaize and Ahold is currently not incorporated into Delhaize's rating owing to the early stage of the discussions and the possibility that the discussions will not result in a future transaction.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook reflects the strong positioning of the rating within the Baa3 category and Moody's expectation that Delhaize will be able to gradually rebuild its operating profitability in Belgium driven by the implemented transformation plan and that it can maintain its performance in the US which together would result in gradually improving credit metrics.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure on the rating would arise if Delhaize maintains its underlying performance in the US and rebuilds its operating profitability in Belgium. An upgrade would require:

• Retained cash flow/net debt to remain above 25%

• Adjusted gross leverage to fall to 3.0x or below

A material deterioration of Delhaize's operating performance in the US or failure to stabilise the Belgium operations could weaken the company's financial profile and result in negative rating pressure.

Quantitatively, the rating would be under pressure if:

• Retained cash flow/net debt falls below 15%

• Adjusted gross leverage trends towards 4.0x

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Retail Industry published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Delhaize is an international food retailer with operations in 7 countries across North America, Europe and Asia. Delhaize generates most revenues from the US (63% of total revenues in 2014), a market the group entered in 1974 and where it remains concentrated in the eastern states under the banners of Food Lion and Hannaford. In its home market of Belgium (23% of 2014 revenues), the group mainly operates under the Delhaize Le Lion, AD Delhaize, Proxy Delhaize, Shop & Go and Tom & Co banners. In 2014, Delhaize reported revenues of EUR21.4 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.

Sven Reinke
Vice President - Senior Analyst
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

Michael J. Mulvaney
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

Moody's changes outlook on Delhaize's Baa3 rating to positive; affirms ratings
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