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Rating Action:

Moody's downgrades BJ's Corporate Family Rating to B2; rates proposed new debt issuances; outlook negative

10 Sep 2012

Approxomately $1.6 billion in rated debt affected

New York, September 10, 2012 -- Moody's Investors Service today downgraded to B2 from B1 the corporate family rating of BJ's Wholesale Club, Inc., ("BJ's"), downgraded the ratings on two existing secured term loans, and also assigned provisional ratings to two proposed secured term loans. The rating outlook is negative.

Ratings downgraded:

Corporate family rating to B2 from B1

Probability of default rating to B2 from B1

Ratings downgraded and to be withdrawn upon closing of proposed new loans:

$1.075 billion secured first lien term loan to B2 (LGD 4, 57%) from B1 (LGD 4, 57%)

$200 million secured second lien term loan to Caa1(LGD 5, 88%) from B3 (LGD5, 84%)

New ratings assigned:

$1.225 billion secured first lien term loan at (P) B3 (LGD 4, 63%)

$400 million secured second lien term loan at (P) Caa1(LGD 5, 86%)

New ratings to be assigned upon closing and repayment:

$1.225 billion secured first lien term loan at B3 (LGD 4, 63%)

$400 million secured second lien term loan at Caa1(LGD 5, 86%)

RATINGS RATIONALE

"The downgrade to B2 reflects the increase in leverage that will result from BJ's paying a dividend of $643 million to its sponsors and certain members of management, which represents a little more than the total equity invested in the company in September 2011 in conjunction with the company's LBO," stated Moody's Senior Analyst Charlie O'Shea. "The result of this highly-aggressive shift in financial policy will be debt/EBITDA pro forma for this proposed dividend of well over 6 times, which is the downgrade trigger that was set for the B1 rating, and interest coverage will reduce to close to 1.3 times. In addition, the financial policy tone being set by virtue of this leveraged dividend is highly-aggressive, which is also a key rating factor."

BJ's is proposing to raise around $690 million in new debt to execute a $643 million dividend to its sponsor/owners (affiliates of Leonard Green Partners ("LGP") and CVC Capital Partners ("CVC")) roughly one year after the closing of the LBO that took the company private. Components of the proposed financing to pay this dividend, which represents in excess of the original equity contribution, include: 1) a new $1.225 billion first lien term loan that will repay and replace the existing $1.07 billion first lien term loan, resulting in net proceeds of around $155 million; 2) a new $400 million second lien term loan that will repay and replace the existing $200 million second lien term loan, resulting in around $200 million in net proceeds; 3) a sale/leaseback transaction that will result in around $280 million in proceeds, and 4) a net approximately $50 million draw under the existing unrated ABL.

The B2 corporate family and probability of default ratings reflect BJ's high leverage as measured by debt/EBITDA, which will now be well over 6 times, weak interest coverage with EBITA/interest of around 1.3 times, as well as its limited ability to generate free cash flow sufficient to attain a free cash flow/net debt metric above the low single digits on a percentage basis. The ratings also reflect the tone of financial policy tone being set by the new dividend.

The ratings continue to be supported by BJ's significant "annuity stream" of membership revenue, which stood at around $220 million for the July 2012 LTM period, its favorable position in the warehouse/wholesale club segment of retail, with its focus on grocery-equivalents, and its strong position in the populous Northeast region of the U.S. Ratings also consider the "covenant lite" structure of the proposed credit facilities, as well as continued inherent issues surrounding the ownership of BJ's by private equity firms. Some of these issues include the potential for additional extractions of equity and otherwise maintenance of a shareholder-friendly financial policy, which could lead to a further leveraging and weakening of the company's capital structure. "BJ's is a strong and very credible competitor in its key Northeast market, with leading market share as measured by store locations," stated Moody's Senior Analyst Charlie O'Shea. "Moody's also recognizes BJ's excellent operating performance trend over the past several years, which indicates that the company has been able to perform well through myriad economic cycles, as well as its good liquidity."

The downgrade of the existing term loans, ratings for which will be withdrawn upon closing of the proposed new term loans, result from the downgrade of the corporate family and the application of Moody's Loss Given Default Methodology, as well as their respective positions in the capital structure. The B2 rating on the existing $1.075 billion term loan recognizes the benefit of first position collateral mortgages on a pool of warehouse clubs, as well as its more senior position in the capital structure. The Caa1 rating on the existing $200 million term loan reflects the lack of any tangible hard asset collateral and its more junior position in the capital structure.

The ratings on the proposed new term loans result from the application of Moody's Loss Given Default Methodology, as well as their respective positions in the capital structure. The (P) B3 rating on the proposed $1.225 billion term loan recognizes its more senior position in the capital structure, with reduced benefit of real estate collateral by virtue of the proposed new sale/leaseback transaction, which will remove approximately $300 million in real estate value from the previous collateral pool. The (P) Caa1 rating on the proposed $400 million term loan reflects its more junior position in the capital structure, and the lack of any tangible hard asset collateral. Upon conclusion of the proposed transactions, Moody's will remove the Provisional (P) designation and B3 and Caa1 ratings will be assigned respectively.

The negative outlook recognizes the impact on the company's quantitative credit profile of the increased debt incurred to fund the dividend, as well as the company's highly-aggressive financial policy. Any additional debt beyond that which is contemplated under the proposed new transaction, reductions in interest coverage, or weakening liquidity beyond the company's profile pro forma for this proposed transaction would likely result in a downgrade. Moody's notes that liquidity, while good, remains negatively impacted by the approximately $350 million that is still outstanding on the unrated ABL which was utilized to help finance the September 2011 LBO.

Given the company's aggressive financial policy and the negative outlook, an upgrade is unlikely. Over time, stabilization of the outlook could occur if BJ's can generate free cash flow sufficient to reduce leverage as measured by debt/EBITDA to a sustained level approaching 6 times, with interest coverage as measured by EBIT/interest reaching1.5 times. In addition, the highly-aggressive tone of the company's financial policy would need to temper, and liquidity would have to improve.

Ratings could be downgraded if the company's financial policy continues to be aggressive, liquidity weakens, or if its credit metrics do not begin to show improvement in the short term, with any increases in leverage as measured by debt/EBITDA or decreases in interest coverage as measured by EBITA/interest likely leading to a downgrade.

The principal methodology used in rating BJ's Wholesale 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.

BJ's Wholesale Club, Inc., based in Westborough, Massachusetts, is a leading warehouse club retailer, with 195 locations in 15 states. Annual revenues are around $11 billion. The company was taken private in September 2011 in a leveraged transaction by affiliates of Leonard Green Partners ("LGP") and CVC Capital Partners ("CVC") for around $3 billion.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Charles O'Shea
Vice President - Senior Analyst
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

Kendra M. Smith
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 downgrades BJ's Corporate Family Rating to B2; rates proposed new debt issuances; outlook negative
No Related Data.
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