S&P places Dollar General's ratings on CreditWatch with positive implications, citing company's strong operating results, cash flow expansion, expectations for an improved 2012 risk profile

Cindy Allen

NEW YORK , March 23, 2012 (Standard & Poor's) – -- U.S. discount retailer Dollar General Corp. continues to achieve  strong operating results and we expect debt leverage to approach the low-2.0x area in 2012.
-- We are placing our ratings, including the 'BB+' corporate credit rating, on CreditWatch with positive implications.
-- We base the CreditWatch on continued cash flow expansion and our expectations for further improvement in its financial risk profile in 2012.

Rating Action
On March 22, 2012, Standard & Poor's Ratings Services placed its ratings, including the 'BB+' corporate credit rating, on Credit Watch with positive implications, following Dollar General's better-than-expected operating results for the quarter ended Feb. 12, 2012. The 'BBB' rating on the $1.7 billion first-out term loan is affirmed and not placed on Credit Watch Positive because there is limited upgrade potential on this debt based on the collateral coverage.

Rationale
The ratings on Dollar General reflect our expectation that the company's value-focused merchandising strategy and continued store expansion will sustain the positive operating momentum and contribute to further improvement in credit measures. We view Dollar General's business risk as "satisfactory" (based on our criteria), because of its good market position as the largest dollar-store chain in the U.S., with over 9,000 stores, good prospects for future growth, and improved merchandising and operating efficiencies. Still, Dollar General operates in the highly competitive discount retail sector and is pursuing an aggressive growth plan, in our opinion. We expect the positive operating momentum to continue in 2012--albeit at a slower pace than in 2011--as a result of its value proposition and good execution.

We currently view Dollar General's financial profile as "significant." However, given the improvement in credit protection measures we expect, we believe credit protection measures could improve to levels in line with that of an "intermediate" financial profile. In our base case, we forecast total debt to EBITDA to decline toward the low-2.0x and EBITDA interest coverage to
increase to over 6x in 2012, mainly through EBITDA growth. We forecast free cash flow to remain healthy. Dollar General generated over $500 million of free cash flow in 2011. Dollar General recently approved a $500 million share repurchase program and has $315 million outstanding. Going forward, we expect Dollar General to use a significant portion of its free cash flow to fund share repurchases rather than debt reduction.

CreditWatch
We will resolve the CreditWatch following a review of the company's financial policy, given the majority ownership by equity sponsors, as well as their future store growth and operating strategies. We expect to raise the ratings by one notch, raising the corporate credit rating to 'BBB-', an investment-grade rating, from 'BB+', with a stable outlook.

Related Criteria And Research
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Ratings Affirmed; CreditWatch Action
To From
Dollar General Corp.
Corporate Credit Rating BB+/Watch Pos/-- BB+/Stable/--

Dollar General Corp.
Senior Secured First Loss BB+/Watch Pos BB+
Recovery Rating 4 4
Subordinated BB-/Watch Pos BB-
Recovery Rating 6 6

Ratings Affirmed

Dollar General Corp.
Senior Secured First-Out BBB
Recovery Rating 1



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