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Rating Action:

Moody's upgrades Delhaize's rating to Baa2; stable outlook

18 Mar 2016

London, 18 March 2016 -- Moody's Investors Service has today upgraded the long term issuer and senior unsecured ratings of Delhaize Group (Delhaize or the company) and the senior unsecured rating of its affiliate Delhaize America, LLC to Baa2 from Baa3. The outlook is stable.

"Our decision to upgrade Delhaize's rating to Baa2 reflects the strong financial profile driven by stable cash flow generation and further reduction in adjusted debt," says Sven Reinke, a Moody's Vice President--Senior Credit Officer and lead analyst for Delhaize. "It also considers the implementation of the Transformation Plan that has helped to stabilize Delhaize's performance in Belgium."

Delhaize's ratings were placed on review for upgrade on 25 June 2015 following the announcement of a proposed combination of businesses with Koninklijke Ahold NV's (Ahold, Baa2 stable), through a merger of equals. However, prior to placing Delhaize's ratings on review for upgrade, the outlook was changed to positive from stable indicating positive rating pressure. Today's rating upgrade is independent of the likely all share merger between Delhaize and Ahold as Moody's now considers Delhaize's credit profile to be sufficiently strong for the Baa2 rating category on a stand-alone basis.

RATINGS RATIONALE

Today's rating action reflects gradual but steady improvements to Delhaize's key credit metrics over the last few years largely driven by a material reduction in funded debt which lowered to EUR2.5 billion at the end of 2015 from EUR3.2 billion at the end of 2011. Delhaize's key credit metrics are within our previously defined upgrade guidance for the Baa2 rating. For example, Delhaize's lease adjusted gross debt/EBITDA ratio was 2.8x and its retained cash flow/net debt ratio was 36.2% in the 12-month period through Q3 2015.

Another key driver for the rating action is the fully executed 'Transformation Plan' for Delhaize's Belgium operations. Delhaize has been under pressure in its home market of Belgium for some time as ascendant discounters gain market share from the company, eating into its sales and operating margins as indicated by the drop in the underlying operating margin in 2014 to 2.4% from 3.9% a year earlier. In February 2015, Delhaize agreed with the unions a restructuring plan of its Belgium operations that contains amongst other things (1) the contraction of the workforce by 1,800 employees -- this has now increased to 2,100 employees - through voluntary early retirement and voluntary leave, (2) the discontinuation of company operated activities in 10 supermarkets with unsustainable financial performance, (3) the modification of wage measures and benefits for all employees, and (4) a new competitive collective labour agreement for new joiners and a new store organisation. Delhaize expects to achieve at least EUR80 million of annual savings from 2018 which shall be reinvested into the business.

Despite the negative impact of the implementation of the 'Transformation Plan' in the first half of 2015, Delhaize's Belgium performance showed early signs of a gradual recovery towards the end of 2015 with strong sales growth in the fourth quarter of 5.6% and an increase in the underlying operating profit margin to 2.5% from 1.9% in the fourth quarter of 2014.

Outside of Belgium, Delhaize reported a strong top-line performance in 2015, with a 2.2% year-over-year revenue increase in local currency (both excluding the 53rd trading week in 2014) in the US. Despite further price investments in the region, Delhaize's underlying operating profit margin increased slightly to 4.0% compared with 3.9% in 2014 (excluding the 53rd sales week). Delhaize's performance in South-Eastern Europe was strong in 2015 as well as indicated by a 10.2% sales increase at identical exchange rates and a further rise in underlying operating margin to 4.7% compared with 4.4% in 2014.

On 24 June 2015, Delhaize and Ahold announced their intention to merge both companies in an all-share transaction. Delhaize shareholders will receive 4.75 ordinary shares of Ahold for each ordinary share of Delhaize. Ahold's shareholders will own approximately 61% of the combined company's equity and Delhaize's shareholders will own approximately 39% of the combined company's equity. The transaction which has already been approved by both companies' shareholders is likely to close in mid 2016, subject to certain regulatory approvals. The proposed combined company, named Koninklijke Ahold Delhaize, will have a portfolio of strong retail banners, with more than EUR54 billion in sales and 375,000 associates. The combined company targets to attain run-rate synergies of EUR500 million per annum three years after completion.

Moody's views the proposed merger as beneficial for both companies, as it would create a leading food retailer in the Benelux, the Eastern states of the US, as well as some parts of Eastern and South-Eastern Europe. The combination of the two businesses would be a logical step towards a financially stronger player in a consolidating industry, where economies of scale and purchasing power are key success drivers. The transaction structure supports the combined entity's credit profile, as it is an all-share merger without additional incremental debt. As both companies have largely similar credit metrics, we expect the combined company to have a financial profile that meets Moody's requirements for a Baa2 rating.

Delhaize's Baa2 long-term issuer and senior unsecured ratings are underpinned by: (1) the company's fairly stable free cash flow generation, (2) leading position in its key markets, (3) disciplined capital expenditures and working capital management, and (4) its conservative financial policy. Furthermore, Delhaize exhibits a strong liquidity profile and a comfortable debt amortisation profile with no bond maturities in 2016, EUR159 million in 2017 and EUR400 million in 2018. The rating, however, also reflects the early stage of the turnaround in Belgium where profitability remains significantly below the group-wide average as well as some degree of uncertainty with regard to the impact of the economic situation on the company's operations in Greece which have performed very strongly so far.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on Delhaize's ratings reflects Moody's expectation of a gradual recovery of the company's operating margins in Belgium on the back of the Transformation Plan as well as stable performance in its other regions. Strong free cash flow generation enables Delhaize to maintain its financial profile even if shareholder remuneration increases going forward.

Despite Moody's assessment of the proposed merger being credit positive, the rating agency does not anticipate an immediate rating upgrade to Baa1 at completion of the merger. At the same time, a failure of the proposed merger would not put Delhaize's ratings or outlook under negative pressure as the company's credit profile is sufficiently strong on a stand-alone basis for the Baa2 rating with a stable outlook.

WHAT COULD CHANGE THE RATING UP/DOWN

After today's ratings upgrade to Baa2, a further upgrade of Delhaize's credit ratings is unlikely in the medium term on a stand-alone basis should the proposed merger with Ahold not succeed. However, over the medium term, Moody's would consider a rating upgrade of Delhaize, on an standalone basis, if its underlying profit margins in the US remain above 4.0%, and operating profitability in Belgium returns to at least 3.0% on a sustained basis. An upgrade would also require

- (1) RCF/net debt to remain above 35%; and

- (2) adjusted gross leverage to fall to 2.5x or below.

Negative rating pressure would develop if the merger with Ahold does not succeed and if Delhaize's operating performance deteriorates materially thereby weakening the company's financial profile. Quantitatively, the rating would be under pressure if

- (1) RCF/net debt falls below 25%; and

- (2) adjusted gross leverage rises above 3.0x.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Retail Industry published in October 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Delhaize is an international food retailer with operations in 7 countries across North America, Europe and Asia. Delhaize generates most revenues from the US (66% of total revenues in 2015), a market the group entered in 1974 and where it remains concentrated in the Eastern states under the banners of Food Lion and Hannaford. In its home market of Belgium (20% of 2015 revenues), the group mainly operates under the Delhaize Le Lion, AD Delhaize, Proxy Delhaize, Shop & Go and Tom & Co banners. In 2015, Delhaize reported revenues of EUR24.4 billion and generated EUR1.4 billion of reported EBITDA.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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

Marina Albo
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 upgrades Delhaize's rating to Baa2; stable outlook
No Related Data.
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