(The following statement was released by the rating agency) Overview
-- U.S. based grocery store operator, BI-LO LLC, is issuing $140 million of senior secured notes, an add-on to an existing $285 million issue, the proceeds of which will be used to fund a dividend to equity holders, and pay fees associated the transaction.
-- Operating trends at Winn-Dixie and BI-LO supermarkets have been better than we expected, so we increased our forecast of the company's profitability.
-- We are affirming the ratings, including the 'B' corporate credit rating and 'B-' issue level rating and a '5' recovery rating to the company's senior secured notes.
-- The outlook is stable, which incorporates our expectation of profit growth at the company as a result of sales growth at both banners and costs savings resulting from the integration of Winn-Dixie Stores Inc.
Rating Action On 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 secured note issuance due 2019, to which the company is looking to add an additional $140 million. $285 million is currently outstanding. The '5' recovery rating indicates our expectation of modest (10% to 30%) recovery of principal in the event of default.
The rating reflects better operating trends at BI-LO LLC and Winn-Dixie Stores Inc. than we expected. These trends have resulted in credit metrics that are similar to those earlier in the year, despite the higher debt. The rating on BI-LO reflects our view of the company's business risk profile as "weak," which we revised from "vulnerable." This revision reflects our expectation that the positive trends at BI-LO's supermarkets will continue and that management will improve the operations at Winn-Dixie by reducing costs and making price investments to gain market share and grow sales. The business risk assessment also incorporates the company's participation in the intensely competitive supermarket industry, and the still relatively weak operating metrics of the recently combined company relative to many industry peers. We view the company's financial risk as "highly leveraged," based on forecasted credit ratios, the company's limited asset protection, and the very aggressive financial 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-digit range and expanding operating margins. As a result, we have increased our expected EBITDA forecast by about 10%. With the increased debt to fund the dividend payment, our current forecast of the company's credit ratios is not materially different compared with those in March of this year, when BI-LO closed on the acquisition of Winn-Dixie. Since then, management has begun to use similar operating strategies at Winn-Dixie that BI-LO has used over the past few years, which entails managing in-store costs more acutely and employing more competitive pricing strategies. We expect a similar performance trend for the remainder of 2012, and outline the specifics below:
-- Low- to mid-single-digit comparable-store sales increases at both concepts.
-- No meaningful change in stores or square footage this year; thus companywide revenue growth should be near comparable-store sales growth.
-- Moderate margin improvement, though cost-cutting and management efforts may be partly offset by gross margin investments at Winn-Dixie.
-- Some benefits from the reduction of duplicative functions, as a result of 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 at the end of 2012 as outlined below:
-- Operating lease-adjusted debt leverage of about 5.1x at the end of 2012.
-- 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 "highly leveraged" financial risk profiles, while FFO to debt are commensurate with indicative ratios of "aggressive" financial risk profiles. However, we view the company's financial policies as "very aggressive," which is an important factor in assessing the overall financial risk profile.
BI-LO has grown sales better than most industry competitors over the past few years, which we believe is a result of its pricing initiatives, the roll-out of its fuelperks! program, and relatively good market presence. More recently, Winn-Dixie has rolled out its fuelperks! program and has made technological investments that should help its inventory management, aiding its sales and operating performance, in our view. This should continue in the next year.
Better pricing strategies could lead to further sales gains. Therefore, we believe the combined company may have the opportunity to exceed our performance expectations with greater-than-anticipated sales growth. Conversely, the biggest threat to our performance expectations is that price competition may intensify in the industry as a result of sustained high unemployment and rising gasoline prices. Both BI-LO and Winn-Dixie would then be unable to pass along higher food costs to consumers, and there would be greater margin contraction than we currently expect, leading to lower profits.
We view BI-LO's liquidity as "adequate," and we expect its sources of liquidity 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 the company's revolving credit facility and funds from operations. Liquidity uses include capital spending and working capital needs. We also forecast the company will generate meaningful free cash flow, and, given expected capital spending levels, we believe that beginning in 2013, the company can convert between 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 EBITDA declines 15%. The company has no meaningful maintenance financial covenants. It has sound relationships with the banks, in our view.
Recovery analysis For 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 will improve credit metrics, with profit growth for the remainder of the year. We would consider a higher rating if management successfully implements its strategic operational initiatives at Winn-Dixie while BI-LO continues with is positive operating trends, and the combined company improves debt leverage to the mid-4x area and FFO to debt to approximately 18%. This could occur in 2013, if the company meets our 2012 expectations and grows EBITDA by roughly 8% and reduces debt by about $120 million. However, we currently view the company's financial policy as "very aggressive," given its private ownership. Consideration for a higher rating will likely require a reassessment of the company's financial policy as well as expectations for sustained improvement in credit protection measures.
Conversely, we would consider a lower rating if debt leverage rises to the mid-6x area, which could occur with a 25% decline of EBITDA from our forecasted levels. This could in turn occur with only 2% sales growth and about 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 Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Standard & Poor's Ratings--And Their Role In The Financial Markets, April 15, 2008
-- 2008 Corporate Ratings Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Ratings Affirmed BI-LO LLC Corporate Credit Rating B/Stable/-- $425 Mil. Sr Secured Notes Due 2019 B- Recovery Rating 5
(Caryn Trokie, New York Ratings Unit)