Moody's Investors Service assigned a Ba2 rating to the Great Atlantic & Pacific Tea Company's (A&P) new $280 million senior secured bank facility because of the highly competitive supermarket industry. "[For the consumer] there are lots of options other than the chain store," said Elaine Francolino, senior credit officer at Moody's. "If you just look at Manhattan, the area is not growing demographically. There's the same base of people and a lot of marketers trying to get their business." Headquartered in Montvale, N.J., A&P operates about 750 supermarkets in 15 states, the District of Columbia and Ontario.
The rating notes that the company has implemented a strategy called Project Great Renewal, a multi-year initiation strategy which has included closing weak stores and upgrading surviving stores. While Francolino says the effort has shown early signs of success, competition from other companies remains a concern. "Real signs of cost savings will be farther in the future," she said.
Supporting the rating is the company's name and reputation. "They're a good company; they have the number-two market share in most markets. Sales are as good or better than most of their competitors, but at the end of the day, they may not be as profitable," Francolino said.
Moody's anticipates that profitability will remain challenged in A&P's major markets, as some better capitalized competitors maintain aggressive promotional activities. The rating notes that the company is aware of a potential environmental liability at one of its non-retail sites and has reserved about $4 million to cover potential losses. Should actual losses exceed reserves, ratings could be negatively impacted.
The new three-year secured bank revolving credit agreement will replace the existing senior unsecured bank agreements. The new facility will be guaranteed by subsidiaries and will be secured, primarily by inventory. Borrowings will be governed by a borrowing base. The Ba2 rating reflects Moody's belief that the bank lenders are well protected by collateral value and the structure of the facility, as well expectations that A&P should not need to fully utilize the facility.