Standard & Poor's affirms Safeway's BBB corporate credit rating with stable outlook, reflecting agency's expectation of modest near-term profit growth
December 1, 2011
(Standard & Poor's)
– Pleasanton, Calif.-based grocery store operator Safeway Inc. announced that it will issue $800 million of senior unsecured notes and that it increased its share repurchase authorization by $1 billion.
-- We believe that the debt issuance will weaken credit ratios slightly but that credit ratios remain appropriate for the current rating.
-- We are affirming all ratings, including the 'BBB' corporate credit rating.
-- The outlook is stable, which reflects our expectation of modest profit growth in the near term.
Standard & Poor's Ratings Services said today that it affirmed all ratings on Safeway Inc. This action comes after the company announced that it increased its share repurchase authorization by $1 billion, is issuing $800 million of senior unsecured notes, and entering a planned $700 million term loan facility to be drawn within four months. Our ratings' affirmation assumes that Safeway will use the proceeds from the note issuance for share repurchases at this time. The company's next sizable debt maturity is an $800 million senior unsecured note
due Aug. 15, 2012. We are also assigning a 'BBB' rating to the company's newly issued senior unsecured notes.
"The ratings on Safeway Inc. reflect Standard & Poor Ratings Services' expectation that the company will moderately improve its sales performance in the near term and maintain its strong market position as one of the largest conventional supermarket operators in the U.S. and Canada," said Standard & Poor's credit analyst Charles Pinson-Rose. He added, "This contributes to our view of the company's satisfactory business risk profile."
We characterize the company's financial risk profile as intermediate, which derives support from its ability to generate solid free cash flow. The stable outlook reflects our expectation that Safeway should enhance credit metrics slightly by the end of 2012, mostly as a result of profit growth. However, if performance weakens or if the company adopts more aggressive financial policies, we may consider a lower rating if we believe Safeway will maintain leverage worse than 3.4x and FFO to debt below 18% for a sustained period of time. This would occur if the company maintained expected 2011
year-end debt levels (inclusive of the note issuance), and EBITDA dropped by approximately $100 million or about 4% from current last-12-month levels. We may also consider a negative rating action if we lower our business risk assessment on the company, even if Safeway sustains credit ratios at current levels. This could occur if the company's operating performance lags behind the rest of the industry or if Safeway loses business to nontraditional food retailers. If we revise our outlook to negative, we may also lower our CP rating to 'A-3' from the current 'A-2' rating. We do not expect to consider any positive rating actions in the near term, since we do not foresee considerable improvement in the company's credit metrics.
RELATED CRITERIA AND RESEARCH
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Our Rating Process, April 15, 2008