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Rating Action:

Moody's downgrades Morrisons to Baa3; outlook stable

15 Sep 2015

London, 15 September 2015 -- Moody's Investors Service has today downgraded to Baa3/(P)Baa3 from Baa2/(P)Baa2 the long-term issuer and senior unsecured ratings of Wm Morrison Supermarkets plc (Morrisons) and its guaranteed subsidiary Safeway Limited. Concurrently, Moody's has downgraded Morrisons' short term ratings to Prime-3/(P)Prime-3 from Prime-2/(P)Prime-2. The outlook on the ratings is stable.

"Today's rating action primarily reflects the impact of structural changes in the UK grocery sector, particularly the ongoing shift of consumers to discounters, convenience stores and online retailers, which has caused Morrisons' earnings to contract beyond our previous expectations," says Sven Reinke, a Vice President - Senior Credit Officer at Moody's and lead analyst for Morrisons.

"While Morrisons has made substantial progress in reducing its debt, we expect the company's credit metrics to remain outside the requirements of a Baa2 rating for an extended period of time," adds Mr. Reinke.

RATINGS RATIONALE

The downgrade to Baa3 is primarily driven by the reported 35% year-on-year decline in Morrisons' underlying profit before tax during the first half of FY2015/16, following a 52% decline in FY2014/15. The recent decline reflects a further decrease in like-for-like sales, as well as investments to decrease its prices amid competitive pressure from discounters and other supermarkets.

In H1 FY2015/16 Morrisons' like-for-like sales (ex-fuel, ex-VAT) dropped by 2.7%, with the number of transactions falling by 2.9%, driven by the ongoing shift of consumers to discounters, convenience stores and online retailers. While the half-yearly result marks a less negative trend compared with the 7.4% decline in like-for-like sales in H1 FY2014/15, Morrisons has not registered positive quarterly like-for-like sales growth over the past three years.

Morrisons' decision to dispose of the loss-making convenience store network is likely to help stabilise operating profitability, however it also cements Morrison's reliance on supermarket sales - the most challenged channel in the UK grocery market, which is structurally declining.

Despite falling debt levels, we estimate that Morrisons' adjusted (gross) debt/EBITDA remained unchanged at 4.0x in H1 FY2015/16 owing to lower EBITDA generation. Concurrently, we estimate that retained cash flow/net debt has reduced to about 12%, down from 14.2% in FY2014/15 and 14.8% in FY2013/14, which no longer supports a Baa2 rating.

Morrisons' Baa3 senior unsecured ratings reflect its defensive business profile and low seasonality, and its solid position as the UK's fourth largest grocery retailer. Morrisons' substantial debt reduction since the beginning of FY2014/15, its commitment to further reduce its indebtedness and its strong liquidity profile balances some of the negative pressure on its financial profile caused by the declining operating performance.

Morrisons has made substantial progress over the last 1.5 years in improving free cash flow and working capital cash inflow. Alongside a material reduction in capex, these measures have helped to reduce the company's reported net debt from GBP2,817 million at the end of FY2013/14 to GBP2,086 million in H1 FY2015/16, thereby offsetting some of the negative pressures on the company's financial profile caused by the deteriorating operating performance.

Of the GBP2 billion free cash flow target over the three years to January 2017, Morrison has achieved GBP1.3 billion so far. A key part of the plan is to reach GBP1 billion in property disposals, of which GBP629 million has been achieved -- of which GBP181 million in H1 FY2015/16. It also targets GBP600 million of working capital cash inflow, of which Morrison has already achieved GBP331 million, including GBP125 million in H1 2015/16.

The ratings also factor in the high degree of freehold estate with low operating lease liabilities, and an almost fully funded pension scheme, which is a competitive advantage compared with some of Morrisons' larger peers. The ratings are constrained by the deteriorating operating performance, as indicated by 14 consecutive quarters of like-for-like sales decline and substantially eroded margins that weakened the company's credit metrics.

--RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's view that despite the fact that Morrisons continues to face challenges from structural changes in the UK grocery sector, its operating performance is likely to stabilise in the second half of FY2015/16. Moody's expects that Morrisons' business profile remains affected by the late entry into the online channel and the relatively small size of its online business as well as the absence of convenience store operations. Nevertheless, Morrisons' financial profile could gradually improve through free cash flow generation alongside a stabilisation of its operating performance.

WHAT COULD CHANGE THE RATING DOWN/UP

An upgrade of the ratings 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 would trend towards 3.0x and RCF/net debt improves to at least 20%, while maintaining a satisfactory liquidity profile.

Conversely, there could be negative pressure on the ratings if

(1) Morrisons' operational performance continues to deteriorate beyond the company's guidance for FY2015/16 and its underlying profitability does not stabilise at least at the level reported in H1 FY2015/16

(2) the company's reported net debt does not reduce further towards the low end of the company's guidance of GBP1.9 billion -- GBP2.1 billion at FYE2015/16.

Quantitatively, an adjusted (gross) debt/EBITDA ratio above 4.0x and a RCF/net debt ratio sustainably below 15% for a prolonged period of time could pressure the rating.

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

Wm Morrison Supermarkets plc, headquartered in Bradford, England, is the fourth-largest UK food retailer (based on sales), with revenues of GBP16.8 billion in fiscal year ended 1 February 2015 (2014/15).

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
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

Michael J. Mulvaney
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 Baa3; outlook stable
No Related Data.
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