(The following statement was released by the rating agency)Overview
-- U.S. based grocery store operator, BI-LO LLC, is issuing $140 millionof senior secured notes, an add-on to an existing $285 million issue, theproceeds of which will be used to fund a dividend to equity holders, and payfees associated the transaction.
-- Operating trends at Winn-Dixie and BI-LO supermarkets have been betterthan we expected, so we increased our forecast of the company's profitability.
-- We are affirming the ratings, including the 'B' corporate creditrating and 'B-' issue level rating and a '5' recovery rating to the company'ssenior secured notes.
-- The outlook is stable, which incorporates our expectation of profitgrowth at the company as a result of sales growth at both banners and costssavings resulting from the integration of Winn-Dixie Stores Inc.
Rating ActionOn Oct. 10, 2012, Standard & Poor's Ratings Services affirmed its ratings,including the 'B' corporate credit rating, on the Jacksonville,Fla.-based-BI-LO LLC. The outlook is stable. We are also affirming the 'B-'issue level rating and '5' recovery rating on the company's senior securednote issuance due 2019, to which the company is looking to add an additional$140 million. $285 million is currently outstanding. The '5' recovery ratingindicates our expectation of modest (10% to 30%) recovery of principal in theevent of default.
The rating reflects better operating trends at BI-LO LLC and Winn-Dixie StoresInc. than we expected. These trends have resulted in credit metrics that aresimilar to those earlier in the year, despite the higher debt.The rating on BI-LO reflects our view of the company's business risk profileas "weak," which we revised from "vulnerable." This revision reflects ourexpectation that the positive trends at BI-LO's supermarkets will continue andthat management will improve the operations at Winn-Dixie by reducing costsand making price investments to gain market share and grow sales. The businessrisk assessment also incorporates the company's participation in the intenselycompetitive supermarket industry, and the still relatively weak operatingmetrics of the recently combined company relative to many industry peers. Weview the company's financial risk as "highly leveraged," based on forecastedcredit ratios, the company's limited asset protection, and the very aggressivefinancial policies of the private equity sponsor.
The company's operating performance has been better than we anticipated,marked by comparable-store sales increases in the low- to mid-single-digitrange and expanding operating margins. As a result, we have increased ourexpected EBITDA forecast by about 10%. With the increased debt to fund thedividend payment, our current forecast of the company's credit ratios is notmaterially different compared with those in March of this year, when BI-LOclosed on the acquisition of Winn-Dixie. Since then, management has begun touse similar operating strategies at Winn-Dixie that BI-LO has used over thepast few years, which entails managing in-store costs more acutely andemploying more competitive pricing strategies. We expect a similar performancetrend for the remainder of 2012, and outline the specifics below:
-- Low- to mid-single-digit comparable-store sales increases at bothconcepts.
-- No meaningful change in stores or square footage this year; thuscompanywide revenue growth should be near comparable-store sales growth.
-- Moderate margin improvement, though cost-cutting and managementefforts may be partly offset by gross margin investments at Winn-Dixie.
-- Some benefits from the reduction of duplicative functions, as a resultof combining the two companies.
-- Thus, pro forma EBITDA growth will be in the 15% area.
With higher debt to fund the transaction, we expect pro forma credit ratios atthe end of 2012 as outlined below:
-- Operating lease-adjusted debt leverage of about 5.1x at the end of2012.
-- Pro forma EBITDA coverage of approximately 2.5x for the year.
-- Funds from operations (FFO) to debt to be near 16% over that period.
The leverage and coverage ratios are in line with indicative ratios of "highlyleveraged" financial risk profiles, while FFO to debt are commensurate withindicative ratios of "aggressive" financial risk profiles. However, we viewthe company's financial policies as "very aggressive," which is an importantfactor in assessing the overall financial risk profile.
BI-LO has grown sales better than most industry competitors over the past fewyears, which we believe is a result of its pricing initiatives, the roll-outof its fuelperks! program, and relatively good market presence. More recently,Winn-Dixie has rolled out its fuelperks! program and has made technologicalinvestments that should help its inventory management, aiding its sales andoperating performance, in our view. This should continue in the next year.
Better pricing strategies could lead to further sales gains. Therefore, webelieve the combined company may have the opportunity to exceed ourperformance expectations with greater-than-anticipated sales growth.Conversely, the biggest threat to our performance expectations is that pricecompetition may intensify in the industry as a result of sustained highunemployment and rising gasoline prices. Both BI-LO and Winn-Dixie would thenbe unable to pass along higher food costs to consumers, and there would begreater margin contraction than we currently expect, leading to lower profits.
We view BI-LO's liquidity as "adequate," and we expect its sources ofliquidity to exceed uses over the next 24 months by a ratio of at least 1.2x.Sources of liquidity primarily include available revolver borrowings on thecompany's revolving credit facility and funds from operations. Liquidity usesinclude capital spending and working capital needs. We also forecast thecompany will generate meaningful free cash flow, and, given expected capitalspending levels, we believe that beginning in 2013, the company can convertbetween 25% and 35% of EBITDA to free cash flow
Relevant aspects of BI-LO's liquidity include:Cash sources to exceed cash uses by more than 1.2x over the next 12 months.Net sources to remain positive over the next 12 months, even if EBITDAdeclines 15%.The company has no meaningful maintenance financial covenants.It has sound relationships with the banks, in our view.
Recovery analysisFor the full recovery analysis, please see the recovery report on BI-LO LLC,to be published as soon as possible on RatingsDirect.
The outlook is stable. This incorporates our expectation that the company willimprove credit metrics, with profit growth for the remainder of the year. Wewould consider a higher rating if management successfully implements itsstrategic operational initiatives at Winn-Dixie while BI-LO continues with ispositive operating trends, and the combined company improves debt leverage tothe mid-4x area and FFO to debt to approximately 18%. This could occur in2013, if the company meets our 2012 expectations and grows EBITDA by roughly8% and reduces debt by about $120 million. However, we currently view thecompany's financial policy as "very aggressive," given its private ownership.Consideration for a higher rating will likely require a reassessment of thecompany's financial policy as well as expectations for sustained improvementin credit protection measures.
Conversely, we would consider a lower rating if debt leverage rises to themid-6x area, which could occur with a 25% decline of EBITDA from ourforecasted levels. This could in turn occur with only 2% sales growth andabout 60 basis points of EBITDA margin contraction at the combined company.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global IndustrialsIssuers' Speculative-Grade Debt, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Standard & Poor's Ratings--And Their Role InThe Financial Markets, April 15, 2008
-- 2008 Corporate Ratings Criteria: Ratios And Adjustments, April 15,2008Ratings ListRatings AffirmedBI-LO LLCCorporate Credit Rating B/Stable/--$425 Mil. Sr Secured Notes Due 2019 B-Recovery Rating 5
(Caryn Trokie, New York Ratings Unit)