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Rating Action: Moody's downgrades Seven & i's ratings to A2 on its announcement of the Speedway acquisition; outlook negative
Global Credit Research - 04 Aug 2020
Tokyo, August 04, 2020 -- Moody's Japan K.K. has downgraded Seven & i Holdings Co., Ltd.'s senior unsecured debt rating to A2 from A1 and its senior unsecured shelf rating to (P)A2 from (P)A1.
The outlook on the ratings remains negative.
These rating actions follow Seven & i's announcement on 3 August 2020 that it has entered into a definitive agreement for its US subsidiary, 7-Eleven, Inc. (Baa1), to acquire the Speedway convenience store chain from Marathon Petroleum Corporation (Baa2) for USD21billion. The transaction is subject to customary approvals and is expected to close in Q1 2021.
The downgrade of the ratings reflects an expected spike in leverage following the Speedway acquisition, the biggest in Seven & i's corporate history, as well as the company's increasingly aggressive financial policy, as reflected by its newfound willingness to undertake a substantial, debt-financed acquisition.
The outlook on the company's ratings had been negative prior to the announcement of the Speedway acquisition, reflecting the struggle to maintain the profitability in its core domestic convenience store business as labor shortages have led to rising costs and discounts in franchise fees. The downgrade also reflects weak prospects for Seven & i's department stores, which are increasingly challenged by the decline of brick-and-mortar stores and the accelerating shift to online shopping. The economic slowdown from the coronavirus outbreak is likely to add to these strains.
Seven & i has yet to finalize its permanent financing plan for the acquisition, but if it funds the transaction entirely with debt as expected, the company's debt will increase by over 70%, while its EBITDA by only about 15%, based on its financial results for the fiscal year ended 28 February 2020 (fiscal 2019). Based on these estimates, Seven & i's debt/EBITDA will increase to around 4.2x-4.3x from 2.8x in fiscal 2019.
The Speedway acquisition, which is valued at about 30% of Seven & i's existing assets at a full multiple of almost 14 times EBITDA, points to a growing urgency to seek growth overseas amid weak growth prospects for its domestic businesses. Seven & i's implementation of growth strategies has been mixed, and the execution risk in integrating this large acquisition overseas, where business models are different and margins lower, will be significant.
Given the maturity of the convenience store market in Japan, Seven & i has been seeking to acquire convenience stores overseas. Its last major acquisition was that of Sunoco LP's US convenience stores for USD3.3 billion in 2018. In all, Seven & i currently has a large convenience store presence in North America, with 10,000 7-Eleven locations. Speedway will add about 4,000 more and increase Seven & i's overseas revenue to almost 60% from the current 40%.
The environmental, social and governance (ESG) considerations incorporated into today's action are primarily related to the governance risk indicated by the marked shift in Seven & i's financial strategy and risk appetite by undertaking this large, debt-financed acquisition.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects the uncertainty around the final terms of the acquisition, including any divestments in the Speedway or 7-Eleven assets to comply with anti-trust requirements and permanent financing. It also takes into account the execution risk facing the company in restructuring its domestic operations to defend the profitability of its convenience stores and to turn around its department stores, exacerbated by the current economic downturn.
Given the negative outlook, an upgrade of the ratings is unlikely in the near term. However, Moody's could change the outlook to stable if (1) Seven & i finances the Speedway acquisition and executes on its integration such that it ensures leverage, as measured by debt/EBITDA, will be restored to under 3x within a couple of years of closing; and (2) the company demonstrates a sustained improvement in the operating margin of its superstore, department store and specialty store segments to 2%-3%.
Moody's could also downgrade the ratings if (1) the financing of the transaction results in a significant increase in Seven & i's leverage, such that its debt/EBITDA is sustained above 3x for a prolonged period, or (2) the department stores, the superstores and specialty stores do not improve profitability despite the restructuring efforts.
The principal methodology used in these ratings was Retail Industry (Japanese) published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120382. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Tokyo, Seven & i Holdings Co., Ltd. is a leading Japanese retail company with businesses including convenience stores, superstores, department stores and financial services.
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.
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.
Mariko Semetko VP - Senior Credit Officer Corporate Finance Group Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 Mihoko Manabe Associate Managing Director Corporate Finance Group JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100 Releasing Office: Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: 81 3 5408 4110 Client Service: 81 3 5408 4100
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