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Rating Action:

Moody's revises Safeway's outlook to negative; all ratings affirmed

Global Credit Research - 13 Jun 2013

Approximately $5.7 billion in debt securities affected

New York, June 13, 2013 -- Moody's Investors Service today changed Safeway, Inc.'s rating outlook to negative from stable following the announcement that the company plans to divest its Canadian operations for C$5.8 billion in cash (about C$4.0 billion after taxes and expenses). The company's Canadian operations consist of 223 stores in Alberta, British Columbia, Manitoba, Ontario and Saskatchewan and 12 manufacturing facilities. The proceeds will be used to pay down $2 billion of debt with the majority of the remainder used for share repurchases. All existing ratings, including its Baa3 senior unsecured rating and its P-3 Commercial Paper rating are affirmed.

The change in Safeway's ratings outlook to negative reflects the uncertainty regarding the company's ability to improve operating performance and credit metrics to levels consistent with the Baa3 rating category in the next 12-18 months. We view the sale of the Canadian operations as a credit negative for the remaining company as the Canadian stores have a higher EBITDA margin than Safeway's U.S. operations and generate a healthy free cash flow.

"At 4.8 times and 2.2 times (Moody's adjusted) debt/EBITDA and EBITA/interest respectively for the LTM period ending March 23, 2013, Safeway's credit metrics are weak for its current Baa3 rating category and have not improved meaningfully in the last 12 months", said Mickey Chadha, Senior Analyst at Moody's. "Despite the $2 billion reduction of debt through the proceeds of the transaction, we estimate that the improvement in credit metrics will be modest with debt/EBITDA at around 4.5 times in the next 12-18 months as the sale of the Canadian operations will lower the EBITDA of the remaining company by approximately $520 million, adjusted for intercompany related transactions", Chadha further stated.

The following ratings are affirmed:

Safeway, Inc.

Senior unsecured rating at Baa3

Long term issuer rating at Baa3

Senior unsecured shelf at (P) Baa3

Commercial Paper rating at Prime-3

Canada Safeway Limited

Senior unsecured rating at Baa3

RATINGS RATIONALE

Safeway's top line and operating performance has been pressured as cash strapped consumers have changed spending habits and have become increasingly price conscious. The company's identical store sales growth excluding fuel has been modest at 0.5% for 2012 and 1.5% for the first quarter of 2013. We expect revenue and operating margins will reflect longer term volatility as a result of changes in food and fuel prices, as well as continued competition from traditional supermarkets and alternative food retailers.

Although we expect the momentum of an improving economy and the growth in the company's loyalty programs, private label brands as well as health and wellness products coupled with continued cost control to improve operating performance in the longer term, the company's ability to materially improve metrics in the near to medium term is limited given the continuing pressure on sales and margins due to the intense competitive environment. It will take longer term consistent and continued operating improvement to bring metrics back in line with the current rating.

Safeway's Baa3 senior unsecured rating reflects the company's significant scale of operations and incorporates our expectation that credit metrics will demonstrate an improving trend going forward. The rating reflects the progress that Safeway has made in improving its in-store shopping experience through the "Lifestyle" store concept, the growth in the company's loyalty programs, private label brands as well as health and wellness products, continued cost control, good liquidity, and the expectation of further and sustained debt reduction. The rating also reflects the company's aggressive financial policies, and continuing pressure on revenues and margins in an increasingly competitive business environment.

Given the negative outlook an upgrade in the near to medium term is unlikely. The outlook could be stabilized if improved operating performance and sustained debt reduction result in sustained improvement of credit metrics such that debt/EBITDA approaches 4.0 times, EBITA/interest approaches 2.5 times and retained cash flow to net debt approaches 15%. Stabilization of outlook would also require a balanced financial policy and no deterioration in liquidity.

Over the longer term a higher rating would require financial policies that support credit metrics, good liquidity and sustained positive identical store sales growth in line with peers. In addition, an upgrade would also require debt to EBITDA to be sustained below 3.5 times, retained cash flow to net debt to be sustained above 20% and EBITA to interest to be sustained above 4.5 times.

Ratings could be lowered if identical store sales demonstrate a declining trend relative to peers, or operating margins deteriorate, or if liquidity deteriorates. Ratings could also be downgraded if financial policies remain aggressive. Specifically ratings could be downgraded if debt to EBITDA is sustained above 4.0 times, retained cash flow to net debt is sustained below 15% or EBITA to interest is sustained below 2.5 times.

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

Safeway Inc. is the second largest traditional supermarket chain in North America with 1,638 stores and 32 manufacturing facilities. Safeway's stores are located predominantly in the Western US and Canada, Texas, Chicago and the Mid-Atlantic regions. Revenues totaled approximately $44 billion for the LTM period ending March 23, 2013.

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.

Manoj Chadha
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Ann Hofferber
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's revises Safeway's outlook to negative; all ratings affirmed
No Related Data.

 

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