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Related Issuers
Rating Action:

Moody's downgrades BJ's Corporate Family Rating to B3; rates proposed new debt issuances

30 Oct 2013

Approximately $2 billion in rated debt affected

New York, October 30, 2013 -- Moody's Investors Service today downgraded the Corporate Family and Probability of Default ratings for BJ's Wholesale Club, Inc. ("BJ's") to B3 from B2, downgraded the ratings on two existing secured term loans, and also assigned ratings to two proposed secured term loans. The rating outlook is stable. Ratings are subject to Moody's review of final documentation and terms and conditions.

Ratings downgraded:

Corporate Family Rating to B3 from B2

Probability of Default rating to B3-PD from B2-PD

Ratings downgraded and to be withdrawn upon closing of proposed new loans:

$1.29 billion secured first lien term loan to Caa1 (LGD 4, 63%) from B3 (LGD 4, 64%)

$325 million secured second lien term loan to Caa2 (LGD 6, 91%) from Caa1 (LGD5, 88%)

New ratings assigned:

$1.45 billion secured first lien term loan at B3 (LGD 4, 56%)

$650 million secured second lien term loan at Caa2 (LGD 5, 88%)

RATINGS RATIONALE

"The downgrade recognizes the deterioration in the company's credit metrics that will result from BJ's paying an approximately $450 million debt-financed dividend to its sponsors and certain members of management, as well as the increasingly-aggressive financial policy tone that this dividend sets," stated Moody's Vice President Charlie O'Shea. "Combined with 2012's almost $650 million dividend BJ's will have returned almost $1.1 billion to its sponsor/owners and management in a little over a year. This is well over double the initial approximately $600 million that was contributed as equity to the go-private LBO in September 2011; while debt has increased from $1.8 billion to $2.5 billion. This results in debt/EBITDA pro forma for this incremental debt approaching 8 times, and interest coverage will below 1.3 times, the combination of which results in a quantitative profile that is closer to Caa than B."

The B3 Corporate Family and Probability of Default ratings reflect BJ's high leverage as measured by debt/EBITDA, which will now approach 8 times, weak interest coverage with EBITA/interest of around 1.2 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 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 $240 million for the July 2013 LTM period, its favorable position in the warehouse/wholesale club segment of retail, with its focus on grocery-equivalents, and its strong, but highly concentrated 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. 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 rating and the application of Moody's Loss Given Default Methodology, as well as their respective positions in the capital structure. The Caa1 rating on the existing $1.29 billion term loan recognizes the incremental benefit of first position collateral mortgages on a small pool of warehouse clubs, as well as its more senior position in the capital structure. The Caa2 rating on the existing $325 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 B3 rating on the proposed $1.45 billion term loan recognizes its more senior position in the capital structure, as well as the presence of the real estate collateral. The Caa2 rating on the proposed $650 million term loan reflects its more junior position in the capital structure, and the lack of any tangible hard asset collateral.

The stable outlook recognizes the strength of the company's business model and the overall operating performance of the company. The stable outlook also considers the company's liquidity which, while good, remains negatively impacted by the approximately $300 million that is still outstanding on the unrated $1 billion ABL which was utilized to help finance the September 2011 LBO.

Given the downgrade and the company's highly-aggressive financial policy, an upgrade is unlikely in the near term. Over time, an upgrade could occur if BJ's financial policy tempers such that the company can meaningfully reduce its leverage via application of free cash flow, with a level below 6.5 times necessary for consideration to be given to an upgrade, with interest coverage as measured by EBITA/interest sustained above 1.5 times.

Ratings could be downgraded if there are additional debt-financed extractions of equity, liquidity weakens, or if its credit metrics deteriorate such that EBITA/interest begins to approach 1 time. Moody's notes that BJ's has hedged roughly two-thirds of its existing floating rate debt, with these hedges expiring in March 2016.

The principal methodology used in this rating 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 201 locations in 15 states. Annual revenues are around $12 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

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.

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

Janice Ann Hofferber
Associate Managing Director
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 B3; rates proposed new debt issuances
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