U.S. Markets close in 2 hrs 48 mins
  • S&P 500

    4,180.99
    +13.40 (+0.32%)
     
  • Dow 30

    34,405.04
    +174.70 (+0.51%)
     
  • Nasdaq

    13,574.28
    -8.14 (-0.06%)
     
  • Russell 2000

    2,221.88
    -19.49 (-0.87%)
     
  • Crude Oil

    64.88
    -0.75 (-1.14%)
     
  • Gold

    1,816.40
    +32.10 (+1.80%)
     
  • Silver

    27.55
    +1.02 (+3.86%)
     
  • EUR/USD

    1.2054
    +0.0045 (+0.3737%)
     
  • 10-Yr Bond

    1.5700
    -0.0140 (-0.88%)
     
  • Vix

    19.04
    -0.11 (-0.57%)
     
  • GBP/USD

    1.3886
    -0.0021 (-0.1528%)
     
  • USD/JPY

    109.1110
    -0.0780 (-0.0714%)
     
  • BTC-USD

    56,979.69
    -505.82 (-0.88%)
     
  • CMC Crypto 200

    1,484.83
    +13.42 (+0.91%)
     
  • FTSE 100

    7,076.17
    +36.87 (+0.52%)
     
  • Nikkei 225

    29,331.37
    +518.74 (+1.80%)
     

Bellis Acquisition Company PLC -- Moody's assigns Ba2 CFR to ASDA; outlook stable

·19 min read
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Rating Action: Moody's assigns Ba2 CFR to ASDA; outlook stableGlobal Credit Research - 03 Feb 2021London, 03 February 2021 -- Moody's Investors Service ("Moody's") has today assigned a Ba2 Corporate Family Rating (CFR) and Ba2-PD Probability of Default Rating (PDR) to Bellis Finco PLC, a holding company formed to effect the acquisition of ASDA Group Limited (ASDA or the company) by the Issa Brothers and TDR Capital from Walmart Inc. ("Walmart", Aa2 stable). ASDA is the third largest grocery retailer in the UK by revenue.Concurrently Moody's has assigned Ba2 ratings to 1) the GBP195 million senior secured first lien term loan A due August 2025, 2) the E840 million senior secured first lien term loan B due December 2026, 3) the GBP2.25 billion senior secured notes due December 2026, 3) the GBP500 million senior secured first lien revolving credit facility due June 2025, and 4) the GBP190 million 364-day senior secured first lien revolving credit facility all envisaged by Bellis Acquisition Company PLC, a fully-owned subsidiary of Bellis Finco PLC. Moody's has also assigned a B1 rating to the GBP500 million senior unsecured notes due December 2027 issued by Bellis Finco PLC. The outlook on both entities is stable.The proceeds of the debt financing, alongside rolled finance leases and new equity, will be used to finance the acquisition of ASDA, refinance existing debt and pay transaction fees and expenses. The Transaction is subject to approvals by the Competition and Markets Authority (CMA) and by the Financial Conduct Authority (FCA) with expected closing in the first half of 2021.Today's rating action reflects:** An opening leverage of 5.3x on a Moody's-adjusted basis, with expectations of gradual de-leveraging and positive free cash flow generation over the next 12-18 months** The company's established market position in the stable UK grocery sector and significant scale** The very competitive nature of the UK grocery market, some execution risks related to the separation from Walmart and the lack of an operational and financial policy track record under the new ownershipRATINGS RATIONALEASDA's Ba2 CFR reflects i. its established market position and significant scale in the UK grocery sector, ii. the stable demand for groceries, resulting in relatively stable and recurring cash flow generation, iii. ongoing focus on efficiency and cost reductions and iv. an established and further expanding online offering. In addition, and less positively, the rating also reflects i. the very competitive nature of the UK grocery business, ii. a higher reliance on large store formats compared to peers, iii. relatively higher leverage compared to rated peers, iv. a lack of operational and financial track record under the new ownership, including some moderate risks from the separation from Walmart, and v. more limited governance oversight compared to listed peers.With a market share of around 14%, ASDA is the third largest grocer in the UK, only marginally below Sainsbury's but well behind Tesco Plc (Baa3 stable). The UK grocery market is very competitive both at national and local level across all formats but particularly across traditional supermarkets and hypermarkets, which represent 80% of ASDA's revenue. The company benefits from a low risk business profile thanks to its predominant focus on grocery retailing, accounting for around 85% of its product offering. Demand for food is subject to much less severe fluctuations, cycles and seasonal variations than non-food retail, as demonstrated by the company's relatively stable and recurring cash flow generation. Prior to the current coronavirus pandemic, the food retailing sector was expected to grow by around 3% (in nominal terms) per year until 2023.Like all of the "Big 4" supermarkets, ASDA has faced competitive challenges in the last decade due to the changing dynamics of the UK food market, as a result of which ASDA has seen revenues decline. With a portfolio of shops leaning towards the North of England and Scotland and a value-conscious customer base, ASDA has been particularly exposed to competition from the discounters while booming online shopping negatively impacted on its non-food business. While the sales decline slowed down between 2016-18, it had started to accelerate again before the lockdown measures temporarily benefitted the larger supermarkets with an online offering at the expense of the discounters. ASDA is not present in the convenience grocery segment, one of the fastest growing grocery retail formats in recent years.ASDA has historically operated as a standalone entity of Walmart, with limited reliance on its former parent company with one important exception, as the company is fully integrated with Walmart's IT organisation. Moody's understands that Walmart will provide relevant services through the transition as part of various separation agreements and under a Long Term Agreement (LTA) covering e-commerce, merchandising and supply-chain activities.ASDA's capital structure is relatively highly levered compared to other rated grocers, with Moody's adjusted gross initial leverage of 5.3x in the last 12 months to 30 June 2020 but set to improve to 4.4x by the end of 2022 in Moody's base case, driven by broadly stable EBITDA, positive free cash flows and moderate debt amortisations. Moody's-adjusted initial EBITDA excludes the royalties ASDA has historically paid to Walmart, as the Rating Agency understands they will be terminated, but it includes the additional costs that ASDA will pay for the IT services that Walmart will continue to provide under the LTA. Also excluded is the EBITDA related to operations to be sold, i.e. the petrol fuel stations and the distribution assets. Moody's considers the risks related to planned disposals to be limited because the former represents a condition precedent to the completion of the ASDA transaction itself and because the latter disposal is a sale and leaseback arrangement funded through a bridge loan without recourse to restricted group.Moody's regards the coronavirus outbreak as a social risk given the substantial implications for public health and safety. Although the retail sector is less exposed from a demand standpoint than other sectors, social distancing has increased the costs related to safety of both employees and customers, so far partly offset by business rates relief. The Rating Agency considers the expenses sustained to implement safety measures related to the coronavirus pandemic (net of the business rates relief) as recurring, and therefore included in Moody's adjusted initial EBITDA.Brexit related risks are also not negligible for the UK grocery sector as a whole, in the opinion of Moody's, with around one third of ASDA products being imported from the EU, in line with the UK grocery market average.There are also material contingent liabilities related to ASDA's personnel, including i. the equal value legal claim, ii. the new employee contract introduced in 2019 and iii. the ongoing national minimum wage (NMW) national living wage (NLW) investigations by HRMC. ASDA's directors believe that there are substantial factual and legal defences to these claims and intend to defend the claims. No provision has been recognised on the basis that any potential liability arising is not considered probable by the company's directors. At December 2019, ASDA had around 141,000 staff.Governance considerations relevant to ASDA's credit profile include lacking a track record under the new ownership and without a clear long-term leverage target, the use of PIK debt outside the restricted group creating structural complexity, and currently limited governance oversight. The Rating Agency understands that the company intends to set up a board consisting of a chairman, an independent non-executive director and audit chair, in addition to four board representatives from the new shareholders and one from Walmart.LIQUIDITYMoody's considers ASDA's liquidity profile to be adequate, supported by the undrawn GBP500 million equivalent senior secured first lien revolving credit facility (RCF). The company is expected to generate significant positive free cash flow after debt service costs on an annual basis.STRUCTURAL CONSIDERATIONSThe first lien instrument ratings are in line with the CFR reflecting the limited cushion provided by the unsecured notes and the relatively weak positioning of the CFR in its rating category.OUTLOOKThe stable outlook reflects Moody's expectations that ASDA will reduce Moody's-adjusted leverage below 5x by the end of 2022, driven by broadly stable EBITDA, positive free cash flows and debt amortisations, and with free cash flow to debt in mid-single digits. The stable outlook also factors in the competitive but broadly stable market conditions in the UK grocery sector, no major market disruption due to the exit of the UK from the European Union, and a smooth transition under the new ownership.In addition, the stable outlook factors in broadly stable revenues and EBITDA over the next two years, with planned cost savings offsetting competitive and inflationary pressures. It also assumes adequate liquidity and the absence of major social disputes or governance issues.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Moody's-adjusted leverage reduces sustainably below 4x, with a clear financial policy in line with lower leverage. An upgrade would also require a material increase in free cash flow, with free cash flow to debt improving to at least 10%. An upgrade would also require meaningful like-for-like revenue and EBITDA growth, the absence of major execution challenges, and adequate liquidity.The ratings could be downgraded if leverage remains sustainably well above 5x on a Moody's-adjusted basis over the next 12-18 months, or if there is evidence of a more aggressive financial policy, including shareholder distributions, or if the company generates negative free cash flows. A downgrade could ensue also in case of material execution issues following the separation from its former parent, or if liquidity concerns arise.PRINCIPAL METHODOLOGYThe 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.COMPANY PROFILEWith GBP22.9 billion revenue in 2019, ASDA is the third largest grocery retailer in the UK. Revenue is split between 73% food, 6% general merchandise, 7% clothing and 14% fuel. Food sales are roughly equally split between fresh & produce (53%) and ambient (47%), and between 90% in-store and 10% online. Headquartered in Leeds, West Yorkshire, the group has around 141,000 employees and 18 million customers.REGULATORY DISCLOSURESFor 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_1243406.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.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Roberto Pozzi Senior Vice President Corporate Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Richard Etheridge Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​