PrefBlog

Standard & Poor’s has announced:

• We are placing our ratings on Loblaw Cos. Ltd., Shoppers Drug Mart Corp., George Weston Ltd., and Choice Properties REIT on CreditWatch with negative implications after Loblaw announced its intention to acquire Shoppers for C$12.4 billion.
• We believe this could strengthen Loblaw’s business risk profile by combining Canada’s largest supermarket and pharmacy chains.
• On the other hand, we expect that new debt to fund the acquisition would strain Loblaw’s “intermediate” financial risk profile.
• Pro forma fully adjusted debt to EBITDA of 3.5x-4.0x would be high for the investment-grade rating, but we expect that free operating cash flow will be available for debt reduction in the next few years.

…
In resolving this CreditWatch, we will assess the following key factors:

• Capital structure. We estimate that high fully adjusted pro forma 2013 debt to EBITDA of 3.5x-4.0x would necessitate almost C$2 billion of debt reduction within our two-year rating horizon to return adjusted leverage to the 3x that would be consistent with the intermediate financial risk
  profile;

• Business risk profile. The addition of Shoppers’ “strong” business risk profile should improve Loblaw’s satisfactory score, adding faster-growing and higher-margin pharmacy and cosmetics sales to its mature and competitive food revenue. We expect that realizing the estimated C$300 million of annual synergies would support improved profitability and cash flow, which should further contribute to deleveraging; and
• Group links. We will review the parent-subsidiary links between the four companies, particularly considering that this transaction would reduce George Weston’s Loblaw ownership to below 50%. That said, we believe the four companies’ credit profiles would remain strongly linked by virtue of their strategic integration, further supported by George Weston’s continuing “strong” liquidity and good financial flexibility.

This move follows the moves by DBRS to place both WN and L on Review-Developing.

Loblaws has a single preferred share issue outstanding, L.PR.A, an OperatingRetractible.

Weston has four preferred share issues outstanding, WN.PR.A, WN.PR.C, WN.PR.D and WN.PR.E, all Straight Perpetuals.

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