CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed SUPERVALU Inc.'s (SVU) Issuer-Default Rating (IDR) at 'B-'. Fitch has also affirmed the company's credit facilities and senior unsecured notes. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The rating reflects SUPERVALU Inc.'s (SVU) improved business mix following the March 2013 sale of its New Albertson's, Inc. (NAI) business to a Cerberus Capital Management (Cerberus)-led consortium, which reduced its exposure to the competitive traditional supermarket sector. The rating also considers the significant operating and competitive challenges that will make it difficult to produce a sustained turnaround of the business.
Restoring top-line growth to the Retail Food and Independent Business segments, while maintaining the EBITDA margin, is the key challenge facing SVU. The company's strategy to improve revenue growth includes price investments that will initially constrain sales and therefore gross margins, and will only lead to faster sales growth if lower prices lead to positive store traffic. Fitch assumes sales growth will remain negative in fiscal 2015 in the Retail Food and Independent Business segments, but that this will be largely offset by growth at Save-A-Lot, leading to relatively flat consolidated sales for the year.
The company has targeted $250 million of cost reductions in fiscal 2014 - 2015. Fitch expects some of this to flow to the bottom line, but that the majority will be reinvested in sharper prices, store labor and other initiatives to drive growth. As a result, Fitch expects limited upside to SVU's operating performance.
Each of SVU's segments will continue to encounter competitive headwinds. The retail food segment faces long-term pressure on its gross margins due to competition from discounters, dollar stores, and specialty supermarkets. Similarly, there is long-term margin pressure within the independent business due to competitive pressures facing its independent grocer customers. The Save-A-Lot hard-discount segment has had uneven results recently due to management missteps, but has more favorable longer term growth prospects.
Despite these challenges, Fitch Ratings expects EBITDA will improve in fiscal 2014 (ending February) to the low $700 million range (excluding restructuring charges and $60 million incremental transition services agreement payment) from $650 million in fiscal 2013, as aggressive cost reductions more than offset the effect of price investments in the retail food segment and ongoing pressure on the independent business.
Cost reductions should drive modest improvement to EBITDA in fiscal 2015, though Fitch sees limited upside beyond fiscal 2015 as cost reduction opportunities are expected to diminish and the top line could remain under pressure. Adjusted debt/EBITDAR should improve to the high 4.0x range in fiscal 2014 from 5.0x as of Feb. 23, 2013, and then to the mid-4x range in fiscal 2015-2016 assuming relatively steady EBITDA and some debt reduction from mandatory prepayments of the term loan.
The refinancing risk related to the 2016 note maturity has moderated following a tender offer that reduced the balance outstanding to $628 million. FCF, which is expected to be in the $150 million-$200 million range annually, less mandatory prepayments of the term loan from 50% of excess cash flow (roughly estimated at $100 million per year), would allow the company to accumulate some cash to repay part of this 2016 maturity, with the balance likely repaid with asset sales or another new financing.
SVU's liquidity is adequate, supported by a $1 billion ABL credit facility, with a borrowing base management estimates will range from $900 million to $1 billion. As of November 2013, the company had $213 million of funded borrowings and $108 million of letters of credit against the $1 billion credit facility.
Fitch's ratings on individual debt issues are based on the Issuer Default Rating (IDR) and the expected recovery in a distressed scenario. Fitch has allocated across the capital structure an assumed enterprise value of $2.5 billion (after a 10% reduction for administrative claims). Fitch arrives at this valuation by multiplying an assumed post-default EBITDA of approximately $570 million (20% below the LTM level) by a 4.9x multiple. The multiple is a blended multiple based on 4.0x for the retail food segment, 4.5x for the independent business and 6.5x for Save-A-Lot.
The $1 billion revolving ABL facility is backed by inventories, receivables, and prescription files, which Fitch collectively values at $1.2 billion. The $1.5 billion term loan is backed by real estate and a pledge of the shares of Moran Foods, LLC (Save-A-Lot), which Fitch values at $1.3 billion, assuming a 6.5x multiple of EBITDA (net of allocated corporate expenses). As such, both facilities are assumed to receive a full recovery, leading to a rating on both facilities of 'BB-/RR1'.
The senior unsecured notes are rated 'CCC+/RR5', which implies a 10%-30% recovery. Fitch notes that in a liquidation scenario, SVU's company pension underfunding of $862 million and multiemployer pension (MEPP) underfunding of $482 million would rank ahead of the senior unsecured notes given the unique structural priorities available to the PBGC and pension plan fiduciaries. Therefore, in a liquidation scenario, there would be no recovery to the senior notes.
A downgrade could result if negative operating trends across the business begin to constrain FCF, making it more difficult to address the 2016 maturity with a combination of FCF and asset sales.
An upgrade could result with a reversal of negative business trends supported by a turnaround of the Save-A-Lot segment, a stabilization of the independent business, and steady to improving results in the retail food segment.
Fitch affirms SVU's ratings as follows:
--IDR at 'B-';
--$1.0 billion secured revolving credit facility at 'BB-/RR1';
--$1.5 billion secured term loan at 'BB-/RR1';
--Senior unsecured notes at 'CCC+/RR5'.
The Rating Outlook is Stable
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 20, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers