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Rating Action:

Moody's downgrades Morrisons to Baa2; outlook negative

18 Mar 2014

London, 18 March 2014 -- Moody's Investors Service has today downgraded to Baa2/(P)Baa2 from Baa1/(P)Baa1 the long-term issuer and senior unsecured ratings of Wm Morrison Supermarkets plc (Morrisons) and its guaranteed subsidiary Safeway Limited. Concurrently, Moody's has affirmed the Prime-2/(P)Prime-2 short term ratings of Morrisons. The outlook on the ratings is negative.

"Today's rating action primarily reflects Morrisons' earnings contraction and weak profitability forecast in a structurally changing UK grocery sector," says Sven Reinke, a Vice President - Senior Analyst and lead analyst for Morrisons. "This, together with Morrisons' weak position in the growing online and convenience store channels as well as rising dividend payments, weigh on the company's credit metrics beyond the guidance for the previous rating category for an extended period of time," adds Mr. Reinke.

RATINGS RATIONALE

--RATIONALE FOR DOWNGRADE

Moody's says that the rating action is primarily driven by the reported 13% year-on-year decline in Morrisons' underlying profit before tax after a 7% decline in the previous financial year, reflecting like for like sales decline, as well as investments in prices driven mainly by price pressure from growing discounters. Morrisons' like-for-like sales (ex-fuel, ex-VAT) declined by 2.8% and its number of customers fell by 1.5% in FY2014 driven by the shift to discounters, convenience stores and the online channel. In a currently highly promotional UK grocery sector, Morrisons' cost savings weren't sufficient to compensate for investments in more competitive prices, general cost headwinds and the effect of the like-for-like sales decline, resulting in a 40 basis points year-on-year contraction in its reported underlying operating margin to 4.9%. Morrisons' reported a loss before tax of GBP176 million after non-recurring exceptional costs of GBP903 million related to the decisions to discontinue its Kiddicare operations and impairments for its trading stores and new space pipeline.

Furthermore, GBP1.1 billion of capex in FY2014 and a further increase in the dividend payment resulted in a material increase in Morrisons' reported net debt to GBP2.8billion from GBP2.2billion in FY2013 and GBP1.5billion in FY2012. As a result of lower EBITDA generation and rising debt levels we estimate that that Morrisons' adjusted (gross) debt/EBITDA has risen to 3.1x at the end of FY2014 compared to 2.3x at the end of FY2013. Concurrently, retained cash flow/net debt is estimated to have reduced to about 15% down from 27.3% in FY2013, which no longer supports a Baa1 rating.

Morrisons' reset the profit base and guided for a significant reduction in underlying earnings for FY2015 to GBP325 -- GBP375 million from GBP785 million in the previous year. Although Morrisons announced to scale back its expansion programme materially -- translating into lower capex of GBP550 million in FY2015 and GBP400 million annually thereafter -- Moody's believes that reduced investments will not fully offset the impact of the forecasted lower profit base leading to a further deterioration in its credit metrics.

Moody's notes that Morrisons has reiterated its commitment to a strong balance sheet and investment-grade rating. Morrisons' announcement to generate GBP1billion of proceeds from the sale of real estate assets over the next three years without incurring material additional lease liabilities and to retain the proceeds as well as the commitment to retain an overwhelmingly freehold position supports its investment grade credit profile. However, Moody's considers Morrisons' commitment to further increase the dividend payment when operating profitability is significantly deteriorating a constraint to the company's credit profile.

Morrisons' Baa2 senior unsecured and short-term ratings reflect its largely stable market position as the UK's fourth-largest food retailer and its relatively low business and cash flow volatility with margins broadly in line with those of its European peers; albeit reduced since 2012 as the company has been investing in pricing, marketing and in the development of its multichannel and convenience infrastructure. The rating further factors in the high degree of freehold estate with low operating lease liabilities. The ratings are constrained by the challenging consumer and competitive environment in the UK (Morrisons' sole market), ongoing pressure on sales in a highly promotional environment resulting in negative like-for-like sales growth since 2012/13; and peak in investments leading to an increase in net debt which, combined with reduced earnings, weakened the company's credit metrics.

--RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects Moody's view that the company may face longer-term structural competition in the sector and that the impact of this on future revenue and earnings remains uncertain beyond the company's own forecast period for FY2015. It also reflects Moody's assumption that Morrisons business profile with the late entry into the online channel and its underrepresentation in convenience stores will remain an obstacle for a pronounced period of time. To maintain the current rating, Moody's expects that Morrisons' adjusted debt/EBITDA ratio will not sustainably increase above 3.5x and its RCF/net debt will not sustainably fall below 18%.

WHAT COULD CHANGE THE RATING DOWN/UP

In light of today's rating action, an upgrade of the rating is unlikely in the near to medium term. Over the longer term, positive pressure could materialise if Morrisons sustains positive sales performance and rebuilds its operating profitability. An upgrade would require an improvement in the company's credit metrics such that adjusted (gross) debt/EBITDA is sustained below 3.0x and RCF/net debt in the mid-twenties while maintaining a satisfactory liquidity profile.

Conversely, there could be negative pressure on the rating if Morrisons' operational performance continues to deteriorate beyond the company's guidance for FY2015 and if subsequently underlying profitability does not show signs of a recovery or if the company cannot achieve the intended reduction in reported net debt to GBP2.4 billion -- GBP2.5 billion at FYE2015. Quantitatively, an adjusted (gross) debt/EBITDA ratio above 3.5x and a RCF/net debt ratio sustainably below 18% for a prolonged period of time could pressure the rating.

PRINCIPAL METHODOLOGY

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

Wm Morrison Supermarkets plc, headquartered in Bradford, England, is the fourth-largest UK food retailer (based on sales), with revenues of GBP17.68 billion in fiscal year ended 2 February 2014.

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

Paloma San Valentin
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 downgrades Morrisons to Baa2; outlook negative
No Related Data.
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