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Related Research
Rating Action:

Moody's rates A&P's DIP: Revolver Ba2, Term Loan B2

06 Jan 2011

New York, January 06, 2011 -- Moody's Investors Service today assigned a Ba2 rating to the $450 million super priority senior secured revolver (DIP revolver) and a rating of B2 to the $350 million super priority senior secured term loan (DIP Term loan) of The Great Atlantic & Pacific Tea Company, Inc. (A&P) as Debtor-in-Possession (DIP). Both DIP credit facilities mature June 14, 2012. The higher rating of the DIP revolver reflects the "first out" structure of the facility whereby it will be repaid prior to the DIP term loan. Both ratings take into consideration the size of the DIP facilities versus an estimated recovery value under either a reorganization or liquidation scenario.

Other key considerations include: the structural features of the DIP facilities, the nature of the bankruptcy and reorganization, and the DIP size as a percentage of pre-petition debt. This rating is also in the context of the uncertainty of creditor support for a restructuring plan that provides more than adequate liquidity to address the challenges of historically low operating margins, high fixed costs, persistent economic weakness, lack of strategic direction, and a shrinking revenue base.

Moody's withdrew all previous ratings for A&P on December 16, 2010. The current ratings are being assigned on a point-in-time basis and will not be monitored going forward and therefore no outlook will be assigned.

Ratings assigned to A&P as Debtor-in-Possession are:

- $450 million super priority senior secured revolver, rated Ba2

- $350 million super priority senior secured term loan, rated B2

Numerous factors led to A&P's financial problems and subsequent Chapter 11 filing. These include the lack of coordinated business, marketing, and merchandising strategy, heavy debt burden unfavorable supply and logistics agreements, and significant employee and pension obligations. Issues also include challenges in completing the integration of Pathmark which was acquired in December 2007, and the expense of continuing to pay rents on over 100 closed stores. These problems were made worse by high management turnover, intense price competition within the supermarket industry, deflationary food pricing environment and persistent economic weakness.

Although A&P has yet to formulate a definitive restructuring plan, the bankruptcy process should enable the company to reduce costs and improve liquidity by closing or divesting unprofitable stores, rejecting unfavorable leases, renegotiating vendor and union contracts and moving to a more manageable capital structure. Despite the company's restructuring efforts, Moody's expects A&P to be cash flow negative through the term of the credit facilities. As a result, the primary source of liquidity during the next 18 months will be cash balances provided by DIP term loan, and borrowings under the DIP revolver. Although Moody's expects liquidity to be adequate during the term of the DIP credit facilities, the company's highly concentrated vendor base could strain liquidity if supply is disrupted or if the company is unable to renegotiate supply terms with its major vendors resulting in COD terms.

Moody's is concerned that given the magnitude of problems facing A&P, it may be unable to successfully complete a restructuring and exit from Chapter 11 bankruptcy over the term of its DIP credit agreements. It will be difficult for the company to cut costs and improve operating margins while making much needed investments in store improvements -- especially when cost cuts would need to include concessions from employee unions. Additionally, an extended period of underperformance and lack of strategic direction has resulted in brand erosion which may be difficult to reverse. A&P has hired a new management team with restructuring and turnaround experience to take on these challenges.

Both the DIP credit facilities contain upstream guarantees from all principal operating subsidiaries and benefit from a security package that includes a first lien on all unencumbered assets of the company and its subsidiaries. These assets include capital stock and material owned real estate. Facilities also receive first priority priming liens on all assets securing pre-petition debt.

The DIP revolver has better protection for lenders than does the DIP term loan as it has a borrowing base structure with advances primarily against eligible inventory, receivables, and owned real estate regulates cash advances based on the availability of collateral protection. The DIP term loan is structured as a "first in last out" facility. Therefore in a default scenario borrowings under the DIP revolver must be repaid before any repayment is made to the DIP term loan lenders. Additionally, all mandatory prepayments associated with asset sales, insurance awards, and debt issuance will be first applied to amounts owed under the DIP revolver, second to cash collateralize letter of credit utilizations, and third to the DIP term loan. No voluntary prepayments can be made to DIP term loan lenders until the DIP revolver is fully repaid.

With regards to the value of collateral coverage available to the DIP lenders, A&P's business model results in a relatively low level of tangible asset value overall. The use of operating leases limits real estate ownership while the value of inventories is limited by its perishable nature. We estimate a conservative valuation (after discounts from reported and appraised valuations) of A&P's tangible current assets, unencumbered real estate, leaseholds and leasehold improvements as of December 4, 2010, to be approximately $620 million. While this valuation would be more than sufficient to cover the maximum allowed utilization under the $450 million DIP revolver, it would result in some level of impairment for the $350 million DIP term loan.

The DIP credit agreement contains a number of negative covenants which include a minimum excess availability covenant which requires the company to maintain a minimum of $100 million in excess revolver availability (gradually reducing to $50 million on November 5, 2011). This effectively reduces the maximum allowed utilization of the DIP revolver, thereby affording better protection and coverage for DIP lenders.

Further support to DIP lenders is provided by a minimum liquidity covenant that requires the company to maintain minimum unrestricted cash balance of $100 million through the term of the DIP credit facilities resulting in improved collateral coverage for the DIP lenders on a net debt basis. In addition, the DIP credit agreement also includes a covenant requiring minimum cumulative EBITDA amounts for periods commencing April 24, 2011 through April 21, 2012, and a minimum twelve month trailing EBITDA covenant of $150 million on May 19, 2012 and $175 million on June 16, 2012.

The principal methodology used in rating A&P's DIP credit facilities was Moody's Debtor-In-Possession Lending rating methodology, March 2009, which can be found at www.moodys.com in the Credit Policy and Methodologies directory.

A&P is a supermarket chain operating 395 stores in the northeast US. The company operates its business through four segments consisting of complementary formats: Fresh (A&P, Waldbaum's and Superfresh), Price Impact (Pathmark), Gourmet (Food Emporium) and Discount (Food Basics, Best Cellars and A&P liquor stores).

REGULATORY DISCLOSURES

Information sources used to prepare the credit 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 Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit 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 ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Manoj Chadha
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's rates A&P's DIP: Revolver Ba2, Term Loan B2
No Related Data.
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