Rating Action: Moody's downgrades Bed Bath's CFR to Ba3; outlook remains negative
Global Credit Research - 23 Jul 2020
New York, July 23, 2020 -- Moody's Investors Service, ("Moody's") downgraded Bed Bath & Beyond Inc.'s ("Bed Bath") corporate family rating ("CFR") to Ba3 from Ba2, its probability of default rating to Ba3-PD from Ba2-PD and its senior unsecured notes rating to B1 from Ba2. The speculative grade liquidity rating is unchanged at SGL-1. The outlook remains negative.
"The downgrade reflects continued margin pressure and lower EBITDA as a result of the restrictions in place due to the coronavirus pandemic as well as ongoing competitive challenges that will cause debt/EBITDA to be sustained above our 4x downgrade trigger over the next 12 to 18 months as well as concerns regarding the pace of rebound in consumer demand once government support payments end", said Moody's analyst, Peggy Holloway.
The two notch downgrade of the senior unsecured notes reflects the replacement of its prior unsecured credit agreement with a $850 million asset based credit facility (unrated) which placed the unsecured notes in a more junior position in the capital structure.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The non-food retail sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment. More specifically, the weaknesses in Bed Bath's credit profile has left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Bed Bath remains vulnerable to the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Bed Bath of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
..Issuer: Bed Bath & Beyond Inc.
.... Probability of Default Rating, Downgraded to Ba3-PD from Ba2-PD
.... Corporate Family Rating, Downgraded to Ba3 from Ba2
....Senior Unsecured Regular Bond/Debenture, Downgraded to B1 (LGD4) from Ba2 (LGD4)
..Issuer: Bed Bath & Beyond Inc.
....Outlook, Remains Negative
Bed Bath's Ba3 CFR is constrained by declining same store sales caused by store closures and competitive pressure as well as above average expenses due to product mix shifts and to support key initiatives that will continue to negatively impact operating income. The company is fighting competition from e-commerce and other value players, including Home Goods and Wayfair, as well as traditional players such as Target Corporation, Walmart Inc. and Amazon.com, Inc. While Bed Bath's investments targeted at improving product assortment, marketing, inventory, supply chain optimization and omni-channel capabilities are necessary, concern remains whether or not the turnaround will happen swiftly enough for Bed Bath to retain relevance with its customers in light of stiff competition. It also acknowledges the challenge of implementing a turnaround in the midst of the impact of the coronavirus pandemic and economic recession. The company benefits from scale as the largest dedicated retailer of domestic merchandise and home furnishing, its national footprint supported by a good distribution network, and financial flexibility to support its transformation effort. Additionally, Bed Bath plans on closing 200 lower performing stores over the next two years which will allow them recapture sales at nearby stores and lower occupancy costs.
Bed Bath's CFR is supported by its good liquidity and cost reduction efforts totaling $250 to $350 million in addition to the $85 million SG&A savings announced earlier this year. These cost savings are anticipated over the next 2 to 3 years. Bed Bath's good liquidity position supports the company's ability to fund strategic capex in omni-channel capabilities that will support operations as part of the company's transformation plan. Bed Bath's current cash balance and short-term investments are approximately $1.15 billion, and its nearest note maturity is 2024 and the $850 million ABL expires in June 2023.
The negative outlook reflects Bed Bath's operating performance will remain pressured in the face of COVID-19 and weaker consumer demand as it implements its turnaround strategy. The outlook also reflects the challenge resizing its business to meet a lower level of demand as the secular trends affecting Bed Bath persist.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be downgraded if the company's very good liquidity position deteriorates for any reason, if it is unable to gain traction with respect to key initiatives, including the roll-out of improved omni-channel capabilities, and resetting the cost structure, or if the company experiences significant market share erosion relative to its peers. Quantitatively, ratings could be downgraded if EBITDA-CapEx/interest remains below 1.5x.
Ratings upgrade would be considered after the COVID-19 crisis subsides, the transformation has taken hold evidenced by increasing comparable sales and rising margins with debt/EBITDA sustained below 4.0x and EBITDA-CapEx/interest above 2.0x while maintaining very good liquidity.
Headquartered in Union, NJ, Bed Bath & Beyond Inc is a onmi-channel retailer selling a wide assortment of domestics merchandise and home furnishings which operates under the names Bed Bath & Beyond, Christmas Tree Shops, Christmas Tree Shops andThat! or andThat!, Harmon, Harmon Face Values or Face Values, buybuyBABY and World Market, CostPlus World Market or Cost Plus, PersonalizationMall.com, and Decorist. The company also operates Linen Holdings, a provider of institutional textiles. LTM revenues were approximately $9.9 billion.
The principal methodology used in these ratings was Retail Industry published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Peggy Holloway Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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