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Rating Action:

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

22 Mar 2017

London, 22 March 2017 -- Moody's Investors Service has changed to positive from stable the outlook on the Baa3 long-term issuer and Baa3/(P)Baa3 senior unsecured ratings of Wm Morrison Supermarkets plc (Morrisons), the fourth-largest UK food retailer by sales, and Baa3/(P)Baa3 senior unsecured ratings of its guaranteed subsidiary Safeway Limited. Concurrently, Moody's has affirmed all the ratings.

"Our decision to change the outlook on Morrisons ratings to positive reflects its improved credit metrics on the back of sustainable operating performance gains and ongoing debt reduction. However, the company's forward momentum could slow if rising inflation in the year ahead affects consumer shopping habits," says David Beadle, a Moody's Vice President - Senior Credit Officer and lead analyst for Morrison.

A full list of affected ratings can be found at the end of this Press Release.

RATINGS RATIONALE

Today's outlook change and rating affirmation primarily reflects improved financial profile. The grocer reported an 11.6% increase in underlying profit before tax to GBP337 million in fiscal year ended 29 January 2017 (FY2016-17); a reduction in net debt to GBP1.2 billion from GBP1.7 billion a year earlier; and positive cash flow of GBP408 million, post-dividend and pre-disposal proceeds. Morrisons Moody's-adjusted leverage and interest cover ratios improved to 2.9x and 3.4x, respectively, from 4.0x and 2.5x in January 2016. Retained cash flow to net debt also improved to 27% from 11% a year earlier.

The improving profitability and stronger credit metrics reflect ongoing execution of various strategic initiatives of the company. Programmes focused on working capital efficiencies and property disposals have fuelled debt reduction, which on a net reported basis is down by more than GBP1.6 billion since the end of FY2013-14. A wide ranging cost reduction programme has facilitated price investment, itself aimed at making Morrisons prices more competitive, while the company has also focused on improving quality and serving customers better. The operational focus appears to be yielding positive results as like-for-like sales (LFL) excluding fuel have now been positive for each of the past five quarters, as have transaction volumes.

Morrisons has also made progress with plans to drive further growth in online sales, with changes to the agreement with Ocado (unrated) expected to be earnings accretive in the years ahead. Other recent initiatives designed to broaden revenue streams on a capital light basis include a wholesale agreement with Amazon Fresh (Amazon.com, Inc.; Baa1 stable), the introduction of 'Morrisons Daily' convenience format at fuel forecourts under the ownership and operation of Rontec (unrated), and a planned revival of the Safeway brand, with products being wholesaled to independent convenience retailers.

RATIONALE FOR THE POSITIVE OUTLOOK

The positive rating outlook reflects the operational and financial progress achieved to date and Moody's base case expectations that this will continue. However, the rating agency expects inflation to increase this year, both within the grocery sector and the wider economy. Accordingly, at this stage there is the possibility that changes to consumer shopping habits could negatively impact ongoing progress by Morrisons.

WHAT COULD CHANGE THE RATING UP/DOWN

Further sustained LFL sales growth underpinning sustained profitability of at least current levels, coupled with further modest ongoing deleveraging, could lead to an upgrade. Quantitatively this would translate to adjusted (gross) debt/EBITDA in the region of 3.0x or lower on a sustained basis and an retained cash flow (RCF)/net debt ratio sustainably above 20%.

Conversely, downward pressure on the rating or the outlook could arise if operational performance deteriorated meaning that adjusted (gross) leverage would trend towards 4.0x and the RCF/net debt ratio would trend below 15% for a prolonged period.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Wm Morrison Supermarkets plc

....LT Issuer Rating, Affirmed Baa3

....ST Issuer Rating, Affirmed P-3

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa3

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-3

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Safeway Limited

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa3

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

..Issuer: Wm Morrison Supermarkets plc

....Outlook, Changed To Positive From Stable

..Issuer: Safeway Limited

....Outlook, Changed To Positive From Stable

PRINCIPAL METHODOLOGY

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

COMPANY PROFILE

Wm Morrison Supermarkets plc is quoted on the London Stock Exchange and in March 2017 has a market capitalisation of approximately GBP5.5 billion.

With revenues of GBP16.3 billion in fiscal year ended 29 January 2017 Morrisons is the fourth-largest UK food retailer by sales, behind Tesco Plc (Ba1 stable), Asda (part of Wal-mart Stores, Inc.; Aa2 stable), and J Sainsbury plc (unrated). Morrisons brand focuses on fresh produce at affordable prices. The company holds a solid position in the UK grocery retail market, which is further supported by its significant manufacturing capabilities.

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.

David Beadle
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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​

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