New York, March 26, 2020 -- Moody's Investors Service, ("Moody's") today
downgraded Gap Inc. ("Gap") senior unsecured rating to Ba1 from
Baa2. At the same time, Moody's assigned the company a Ba1
Corporate Family Rating, Ba1-PD Probability of Default rating
and a Speculative Grade Liquidity rating of SGL-2. Outlook
was changed to negative from stable.
"The two-notch downgrade reflects the steady decline in Gap's cash
flow from operations and credit metrics as well as the anticipated disruption
of the COVID-19 virus in the face of unprecedented temporary store
and mall closures", stated Vice President, Christina Boni.
Despite having $1.7 billion of cash and short-term
investments, and the ability to reduce its $360 million common
dividend, Moody's expects Gap's earnings will materially contract
in 2020 and Gap is currently pursuing a secured credit facility.
Downgrades:
..Issuer: Gap, Inc. (The)
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba1 (LGD4) from Baa2
Assignments:
..Issuer: Gap, Inc. (The)
.... Probability of Default Rating -
Ba1-PD
.... Speculative Grade Liquidity Rating -
SGL-2
.... Corporate Family Rating - Ba1
Outlook Actions:
..Issuer: Gap, Inc. (The)
....Outlook, Changed To Negative From
Stable
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The apparel retail sector
has been one of the sectors most significantly affected by the shock given
its sensitivity to consumer demand and sentiment. More specifically,
the weaknesses in Gap Inc.'s credit profile, including
its exposure to store closures, China and consumer demand have left
it vulnerable to shifts in market sentiment in these unprecedented operating
conditions and Gap Inc. remains vulnerable to the outbreak continuing
to spread. We regard the coronavirus outbreak as a social risk
under our ESG framework, given the substantial implications for
public health and safety. Today's action reflects the impact
on Gap Inc. of the breadth and severity of the shock, and
the broad deterioration in credit quality it has triggered.
Gap Inc.'s Ba1 rating reflects its solid market position in the
specialty apparel market with its ownership of three leading specialty
apparel brands (Old Navy, Gap and Banana Republic). The relatively
shorter term of its store leases (approximately five years) has enabled
right sizing of its mature brands (Gap and Banana Republic) while adding
stores to its higher growth concepts (Old Navy and Athleta). Investments
in its online and mobile business have also strengthened its operational
profile and improved customer experience. Continued integration
of its online and store experiences supports its efforts to increase customer
conversion and will offset the impact of temporary store closures.
Nonetheless, the company will suffer significant disruption in the
face of COVID-19 which will reduce its free cash flow significantly.
Although the company has approximately $1.25 billion of
debt due in April 2021, the company is pursuing has a new secured
credit facility to replace its $500 million unsecured revolver,
as it has $2.1 billion of unencumbered inventory and additional
real estate.
The negative outlook reflects Gap's need reset its cost base in
the face of the unprecedented disruption of COVID-19 and an expected
slowdown in consumer spending. The negative outlook also reflects
its need to manage its cash burn through its operational and financial
policy actions while refinancing its capital structure.
An upgrade would require consistency of performance at all its major brands,
maintenance of an unsecured capital structure, very good liquidity,
and a conservative financial policy. Quantitatively, debt/EBITDA
would need to be sustained below 3.0x, and EBIT/Interest
above 4.5x.
Ratings could be downgraded should there be sustained deterioration in
profitability at any of its key brands which significantly impacts liquidity
and it its pursuit of a secured credit facility is unsuccessful.
Ratings could also be downgraded if debt/EBITDA sustained above 3.5x.
Gap Inc. is a leading global retailer offering clothing,
accessories, and personal care products for men, women,
and children under the Gap, Banana Republic, Old Navy,
Athleta, Janie and Jack, and Intermix. Fiscal year
2019 net sales were approximately $16.4 billion.
Gap Inc. products are available for purchase in more than 90 countries
worldwide through 3,345 company-operated stores, 574
franchise stores, and e-commerce sites.
The principal methodology used in these ratings was Retail Industry published
in May 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Christina Boni
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Margaret Taylor
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653