Raley's 'B+' Issuer Credit Rating Affirmed Following Recent Term Loan Pay Down; Outlook Stable

  • U.S.-based food retailer Raley's recently sold its Aisle-1 fuel stations and used the proceeds, along with borrowings from its asset-backed lending (ABL) facility and balance sheet cash, to retire the remaining amount under the $200 million term loan facility.
  • Despite the debt pay down, S&P Global Ratings is affirming its ratings, including the 'B+' issuer credit rating on Raley's, given expectations for slightly softer profitability in the coming year as the company remains a small competitor in the grocery industry.
  • At the same time, we are withdrawing our issue-level rating on the company's $200 million term loan because of the facility's retirement.
  • The stable outlook reflects our expectation that Raley's will maintain a conservative financial policy, including limited balance sheet debt for potential acquisitions in the next 12 months.
NEW YORK (S&P Global Ratings) March 13, 2019--S&P Global Ratings today took 
the rating actions listed above. The affirmation reflects our view of Raley's 
position as a geographically concentrated retail grocer, with onerous $377 
million post-retirement obligations offsetting its recent debt reduction. The 
pay down of the debt facility leads us to project adjusted leverage in the low 
4x area over the next 12 months, from the mid-4x area in the latest 12-month 
period ended September 2018. That said, we are expecting softer operating 
performance in the coming year.

S&P Global Ratings' stable outlook on Raley's reflects our expectation that 
the company will continue to execute a successful and on-trend merchandising 
strategy of high quality perishables, prepared foods, and health and wellness 
offerings. We expect EBITDA margins to remain slightly pressured in the coming 
year as the company balances higher wage and price competition, with modest 
top-line growth from store growth and cost reductions from process 
improvements and supply chain savings.

We could lower our rating if adjusted leverage were 5x or greater. We estimate 
this could occur if operating performance weakened or the company were to 
adopt a more aggressive financial policy. Under such a scenario, comparable 
store sales would decline at a low-single-digit rate and EBITDA margins fall 
by 100 basis points or more compared with our forecast. We could also lower 
the rating if the company increased balance sheet debt by more than $150 
million to fund either acquisitions or shareholder dividends. 

We could raise our rating if Raley's were able to continue to expand and 
diversify its store base while maintaining positive operating growth, 
including a consistent mid-single-digit increase in comparable sales and a 
100-basis-point or more increase in margins. This scenario would likely result 
in adjusted leverage in the mid-to-high 3x area or better, with no material 
change to financial policy on a sustained basis.

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