Morrisons credit rating downgraded by Moody’s

Moody’s Investors Service announced it has downgraded the corporate family rating (CFR) and the probability of default rating (PDR) of Market Holdco 3 Limited, the holding company formed to acquire Wm Morrison Supermarkets Limited, to B2 from B1 and to B2-PD from B1-PD respectively.

US private equity firm Clayton, Dubilier & Rice completed a £7 billion takeover of Bradford-based Morrisons last year.

“The downgrade of Morrisons’ CFR to B2 from B1 was triggered by the company’s operating underperformance in fiscal 2022, ended 30 October and resultant weak credit metrics …” said Moody’s.

“The company’s operating performance during fiscal 2022 was negatively impacted by lower sales (-4.2% like-for-like year on year excluding fuel) and higher input costs – including commodities, energy, wages and transportation, only partly offset by higher fuel margins and cost savings, resulting in lower profit and free cash flow generation compared to fiscal 2021 and Moody’s prior expectations.

“The decline in Morrisons’ sales has slowed down in the last quarter of fiscal 2022 (-2.0% like-for-like excluding fuel) and its market share has stabilised, according to Kantar Worldpanel’s publicly available information, and the important three week period up to Christmas saw sales increase by 2.5%.

“Both trends suggest greater stability of the company’s sales going into fiscal 2023, leading to a recovery of profits through operating leverage, pass-through of higher input costs, and achievement of synergies and efficiencies.

“In terms of profitability, Moody’s base case assumes underlying operating margins of 1.5% and 1.7% and absolute underlying operating profit of around £290 million and £340 million in the next two fiscal years respectively.

“This compares with Moody’s-adjusted underlying operating profit of £240 million in fiscal 2022, for a related margin of 1.3%.

“Leverage, measured in terms of Moody’s-adjusted gross debt to EBITDA, stood at 9.1x at the end of fiscal 2022, based on Moody’s-adjusted gross debt of £7.5 billion and Moody’s-adjusted EBITDA of £828 million.

“Moody’s-adjusted EBITDA includes addbacks of £92 million (transaction costs) related to the acquisition of McColl’s Retail Group (McColl’s) and £105 million (impairments and provisions), which are non-recurring.

“Moody’s currently expects leverage to reduce to around 8x and 7.5x in fiscal 2023 and 2024, respectively, from low-to-mid single-digit percentage sales growth driven by exposure to the convenience channel and fuel sales.

“The expected reduction in leverage will be driven by EBITDA growth and a reduction in gross debt through the repayment of the drawn revolving credit facility.

“Moody’s currently anticipates EBITDA (on a Moody’s adjusted basis) of around £875 million and £925 million in fiscals 2023 and 2024, respectively.

“Profit growth over the next two years will be hampered by restructuring and other exceptional costs, relating to the integration of McColl’s and the implementation of the synergy and efficiency programme, that Moody’s does not adjust for and models at £40-45 million per annum.

“Free cash flow is expected to be positive in each of the next two fiscal years, amounting to 1.5%-3.0% of Moody’s-adjusted debt.”