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Rating Action:

Moody's upgrades PetSmart to B3

16 Jul 2019

New York, July 16, 2019 -- Moody's Investors Service ("Moody's") today upgraded PetSmart, Inc.'s ("PetSmart") Corporate Family Rating and probability of default rating to B3 and B3-PD from Caa1 and Caa1-PD respectively. Additionally, Moody's upgraded the rating of its senior secured term loan and senior secured notes to B2 from B3 and upgraded its senior unsecured notes to Caa2 from Caa3. The outlook is stable.

"The upgrade follows the recent successful IPO of Chewy and the subsequent debt repayment from the proceeds of the IPO thereby improving leverage to 7.2x from 7.8x. The current implied Chewy valuation of about $14 billion is also a positive in terms of coverage for lenders as PetSmart currently owns about 67% of Chewy", Moody's Vice President Mickey Chadha stated. "We also expect credit metrics to improve further in the next twelve months as the company further monetizes its stake in Chewy and uses proceeds to repay more debt ", Chadha further stated.

Upgrades:

..Issuer: PetSmart, Inc.

.... Corporate Family Rating, Upgraded to B3 from Caa1

.... Probability of Default Rating, Upgraded to B3-PD from Caa1-PD

....Senior Secured Bank Credit Facility, Upgraded to B2 (LGD3) from B3 (LGD3)

....Senior Secured Regular Bond/Debenture, Upgraded to B2 (LGD3) from B3 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Caa2 (LGD5) from Caa3 (LGD5)

Outlook Actions:

..Issuer: PetSmart, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

PetSmart's credit profile (B3 stable) reflects the company's high leverage with lease adjusted debt/EBITDA proforma for the $825 million debt reduction through the Chewy IPO proceeds of 7.2 times. However, we do expect further deleveraging in the next 12-18 months as the company continues to monetize its stake in Chewy and reduce its debt burden through these proceeds. Although competition remains intense particularly from e-commerce and mass retailers we also expect the company's topline and margins to stabilize as strategic initiatives take hold. Therefore we expect debt/EBITDA to improve to below 6.5 times in the next 12 months.

Positive rating factors include PetSmart's position as the largest specialty retailer of pet food, supplies and services in the U.S., with a well-known brand and broad national footprint. The company's sizeable services offering is a positive as it provides a defensible market position and is less vulnerable to e-commerce. The pet products industry in general remains relatively recession resilient, driven by factors such as the replenishment nature of consumables and services and increased pet ownership. The company's credit profile is also enhanced by its very good liquidity and the company's 67% ownership of Chewy whose current implied valuation more than covers the amount of total debt outstanding.

The stable outlook reflects Moody's expectation that credit metrics will improve in the next 12 months and liquidity will remain very good.

Sustained growth in revenue and profitability while demonstrating conservative financial policies, including the use of free cash flow and Chewy IPO proceeds for debt reduction, could lead to a ratings upgrade. Quantitatively, ratings could be upgraded if debt/EBITDA is sustained below 5.75 times and if EBIT/interest expense is sustained above 1.5 times while maintaining good overall liquidity.

PetSmart's ratings could be downgraded if same store sales trends continue to deteriorate or if operating margins continue to erode, indicating that the company's industry or competitive profile continues to weaken. Ratings could also be downgraded if the company's financial policies were to become aggressive. Quantitatively, a ratings downgrade could occur if debt/EBITDA does not improve and remains above 6.75 times or EBIT/interest is sustained below 1.0 times.

The principal methodology used in these ratings was Retail Industry published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

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Manoj Chadha
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Janice Hofferber, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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