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Fitch Rates SUPERVALU Asset-Based Loan, Term Loan

February 19, 2013, 08:11 AM
Filed Under: Industry News

Fitch Ratings has upgraded its Issuer Default Rating (IDR) on SUPERVALU Inc. (SVU) to 'B-' from 'CCC'. Fitch has also assigned ratings of 'BB-/RR1' to SVU's new $900 million asset-based lending (ABL) facility and $1.5 billion secured term loan. The Rating Outlook is Stable.

At the same time, Fitch has withdrawn its IDR and issue ratings on New Albertson's, Inc. and American Stores Company, LLC. A full rating list is shown below.
These actions assume the successful completion of SVU's sale of its New Albertson's, Inc. business to AB Acquisition LLC, an affiliate of a Cerberus Capital Management-led consortium, with a closing expected in the first quarter of 2013.

The upgrade reflects SVU's improved business mix, as the sale will reduce the company's exposure to the competitive traditional supermarket sector, and Fitch's expectation for relatively steady financial leverage at around the current level of 4.8x (as of Dec. 1, 2012). The ratings further reflect the company's weak operating trends, particularly within the independent business and Save-A-Lot segments, and the refinancing risk related to a sizable $1 billion senior note maturity in May 2016.

Segment Performance

The disclosure made by SVU in its 8-K dated Jan. 28, 2013 shows that the performance of the supermarket banners that it is retaining is stronger than that of the banners that are being sold to AB Acquisition. The retained banners saw a revenue decline of 4.2% to $4.8 billion for the latest 12 months (LTM) ended Dec. 1, 2012 versus $5 billion in fiscal 2011 (ended February 2011), while EBITDA (pre-corporate expenses) increased 7.8% over this period to $290 million.

By contrast, the banners that SVU is selling saw top line decline by 12% and EBITDA decline by 28% from $1.2 billion to $832 million during the same time period. Therefore the EBITDA margin of retained assets is 6.1% versus 4.7% for divested assets.

SVU's three segments, which currently contribute relatively even proportions of consolidated pro forma EBITDA, face considerable long-term challenges. The retail food segment, which constitutes 35% of total EBITDA and has produced improved EBITDA margins over the past two years, will face long-term pressure on its gross margins due to competition from discounters and specialty supermarkets.
The independent business segment generated EBITDA of $280 million in the LTM period (34% of the total), down 20% from fiscal 2011 due to price investments and the competitive pressure facing its independent grocer customers. Management intends to refocus on this business, though Fitch expects continued soft sales and sees the potential for further margin contraction.

The Save-A-Lot segment produced EBITDA of $252 million in the LTM period (31% of the total), essentially even with fiscal 2011 but down 14% from fiscal 2012. The fact that ID sales have been under pressure (contracting by 4.1% in the third quarter) is somewhat disappointing and worse than expected given that the hard discount segment has typically done well in a soft economic environment. A planned repositioning of this business to incorporate a greater proportion of private label goods is expected to further constrain Save-A-Lot's sales over the next few quarters and may not provide a meaningful boost to EBITDA.

On a consolidated basis, Fitch expects SVU's EBITDA will contract from $742 million in the LTM period to a range of $650 million - $700 million over the next one to two years, due to the repositioning of the Save-A-Lot business and ongoing pressure on the independent business.

Capital Structure

SVU's new debt structure will consist of a new five-year $900 million asset-based revolving credit facility, a six-year $1.5 billion secured term loan, and $1 billion of senior unsecured notes maturing in May 2016. The new revolver and term loan will replace and refinance SVU's existing $1.65 billion asset-based revolver, $846 million term loan, and $490 million of 7.5% bonds maturing in November 2014, which will be called.

This will leave SVU with debt of around $3 billion including revolver borrowings and capital leases, resulting in moderately high pro forma adjusted debt/EBITDAR of around 4.6x as of fiscal year end February 2013, compared with 4.8x at Dec. 1, 2012. Fitch expects leverage will be relatively steady over the next three years, absent meaningful asset sales.

Based on expected FCF of $150 million - $200 million annually over the next three years, SVU will be in a position to refinance a portion of the $1 billion debt maturity in 2016. The balance will have to be covered by asset sales or a refinancing. Fitch assumes that, with Cerberus Capital Management taking an equity stake of up to 30% in SVU, SVU's management will be more aggressive in pursuing asset sales going forward. In that regard, the company's new ABL facility and term loan make provision for a possible sale of the Save-A-Lot business (with the first $750 million in proceeds going towards pay down of the term loan).

The withdrawal of the New Albertson's and American Stores IDR's and senior notes is due to the expectation that there will be no disclosure from these entities after the sale is completed. The senior notes at American Stores will be backed by a $467 million escrow account, which equals the principal amount of the notes outstanding. This strengthens the position of the notes and also effectively alleviates the contingent liability at SUPERVALU Inc. as a result of its downstream guarantee of the notes.

Recovery Analysis

Fitch's ratings on individual issues are based on the IDR and the expected recovery in a distressed scenario. Fitch has allocated across the capital structure an assumed enterprise value of $2.6 billion (after administrative claims). Fitch arrives at this valuation by multiplying an assumed post-default EBITDA of $616 million (17% below the LTM level) by a 4.6x multiple.
The $900 million revolving ABL facility is backed by inventories, receivables and prescription files, which are collectively valued by Fitch 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 $1.5 billion assuming a 6x EBITDA multiple. 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 at the SUPERVALU INC. level are revised to 'CCC+/RR5' from 'CCC+/RR3', which implies a 10% - 30% recovery to these notes.
Fitch notes that in a liquidation scenario, SVU's company pension underfunding of $989 million and multiemployer pension (MEPP) underfunding of $496 million would rank ahead of the senior unsecured notes given the unique structural priorities available to the Pension Benefit Guarantee Corporation and pension plan fiduciaries. Therefore, in a liquidation scenario, there would be no recovery to the senior notes.

Rating Sensitivities:

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 results in the retail food segment.

Fitch has taken the following rating actions on SUPERVALU INC.:

  • IDR upgraded to 'B-' from 'CCC';
  • $900 million bank credit facilities assigned 'BB-/RR1';
  • $1.5 billion term loan assigned 'BB-/RR1';
  • Senior unsecured notes affirmed at 'CCC+'; Recovery Rating revised to 'RR5' from 'RR3'.

View the entire press release.

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