DBRS Downgrades Loblaws … What about Weston?

DBRS has downgraded Loblaw Companies debt from “A” to “A(low)”:

DBRS had placed Loblaw’s long-term ratings Under Review with Negative Implications on February 8, 2007, following the release of 2006 results, which were indicative of a more challenging situation at the Company than previously understood. Sharply lower operating income, net earnings from recurring operations and cash flow for the second year in a row, combined with a significant writedown to goodwill, led to substantially weaker credit metrics (i.e., lease-adjusted cash flow/debt of approximately 20% for 2006) that are not consistent with an “A” rating from DBRS.

The downgrade follows a detailed review, from which DBRS has concluded that Loblaw’s credit risk profile has been affected by the evolving operating and competitive challenges. DBRS believes intensifying competition has been exacerbated by internal problems relating primarily to supply chain management and general merchandise program. These factors have contributed to declining sales growth and operating margins that will not be easily stabilized and reversed.


Preferred share investors will recall that Weston, Loblaw’s parent, is on Credit Watch Negative and DBRS goes on to say:

DBRS ratings for George Weston Limited remain under review with negative implications (where they were placed on February 8, 2007). The review will be completed over the near term.

Weston’s debt is currently rated A(low) … nobody can speak for DBRS except a DBRS spokesman, but I think it’s fair to say that holding companies are more often than not rated at least one notch below their owned operating companies. For example, we can look at the DBRS press release for Weston dated 2006-08-14, after Loblaw was downgraded from A(high):

As such, the one notch differential between Weston and Loblaw is considered sufficient to reflect the structural differences between the parent company (Weston) and the primary operating company (Loblaw).

Should there be further change in the opinion on or ratings of Loblaw, DBRS will assess the impact on Weston at that point in time.

Should Weston’s DEBT be downgraded to BBB, there are not necessarily any implications for the PREFERREDS … but the chance that the prefs will get downgraded have just increased. At least, according to me. We shall see!

Weston issues in the HIMIPref™ universe are: WN.PR.A / WN.PR.B / WN.PR.C / WN.PR.D / WN.PR.E (putting the ticker symbols in posts is my way of tagging them!)

One Response to “DBRS Downgrades Loblaws … What about Weston?”

  1. […] Scotia crossed 25,000 at 25.25, then 75,000 at the same price. Now with a pre-tax bid-YTW of 5.17% based on a bid of 25.21 and a call 2014-10-31 at 25.00. Remember that Weston is still on Credit Wath Negative. […]

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