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
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,
- $350 million super priority senior secured term loan,
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
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).
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
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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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
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The date on which some Credit Ratings were first released goes back to
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Investors Service provides a date that it believes is the most reliable
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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.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates A&P's DIP: Revolver Ba2, Term Loan B2
250 Greenwich Street
New York, NY 10007