L.PR.B Upgraded to Pfd-3(high) by DBRS

DBRS has announced that it:

upgraded the Issuer Rating, Medium-Term Notes, and Debentures ratings of Loblaw Companies Limited (Loblaw or the Company) to BBB (high) from BBB. DBRS Morningstar also upgraded Loblaw’s Short-Term Issuer Rating to R-2 (high) from R-2 (middle) and its Second Preferred Shares rating to Pfd-3 (high) from Pfd-3. DBRS Morningstar changed all trends to Stable from Positive. The upgrades reflect Loblaw’s sound operating performance over the last number of years, independent of the Coronavirus Disease (COVID19) pandemic-related effects on operating results, combined with improved credit metrics following the spin-out of Choice Properties Real Estate Investment Trust (Choice; rated BBB (high) with a Stable trend by DBRS Morningstar). While uncertainties related to the intensity and duration of the coronavirus pandemic as well as the macroeconomic aftereffects remain, the Stable trends reflect DBRS Morningstar’s view that Loblaw is well positioned to navigate the current environment within the new BBB (high) rating category. The BBB (high) ratings also reflect the Company’s strong business risk profile, including its position as Canada’s largest food and drug retailer, and continue to consider the intense competition in Canadian food retail.

DBRS Morningstar expects Loblaw’s financial profile to improve modestly over the medium term, benefitting from growth in earnings, while the Company’s debt balance is projected to remain relatively flat. DBRS Morningstar believes cash flow from operations will continue to track operating income, while capital expenditures (capex) are forecast to remain in the $1.1 billion range in 2020 and 2021. Capex is expected to primarily focus on existing store improvements and process and efficiency improvements as well as e-commerce and information technology projects. DBRS Morningstar believes dividends on a per-share basis will continue to grow but not exceed $500 million in 2020 and 2021 (normalized for timing). As such, DBRS Morningstar forecasts Loblaw’s FCF (before working capital changes) to be well above $2.0 billion in 2020 and 2021. DBRS Morningstar believes the Company will continue to use its FCF to buy back approximately $0.8 billion and $1.0 billion of shares in 2020 and 2021, respectively, with the majority of the balance accounting for lease principal payments. Consequently, credit metrics should improve marginally within the rating category in line with earnings growth and remain acceptable for the new BBB (high) rating (i.e., adjusted debt-to-EBITDA of approximately 3.25x).

The affected issue is L.PR.B

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