US CREDIT-Kroger spreads may tighten even without upgrade

NEW YORK, July 10 (Reuters) - Kroger Co (KR.N) may need
some time to earn its sought-after rating upgrade, but its
bonds are still worth owning as a haven in the face of an
anemic economic recovery, strategists said.

Long a favorite of credit investors, Kroger is already
treated in the credit default swaps market as though it were
rated two steps higher than its Baa2 rating, with five-year
swaps trading at about 90 basis points, according to the
capital markets research group at Moody's Analytics. Its bonds,
meanwhile, are trading about three steps higher than its
rating.

Kroger's credit spreads have narrowed since it posted a
better-than-expected quarterly profit last month as frugal
shoppers were drawn to its private label store brands.

Spreads on its 6.15 percent notes due in 2020, for example,
have tightened to 217 basis points more than Treasuries from
235 basis points before its latest quarterly results.

Even at tighter spreads, Kroger's bonds looks attractive,
given the company's good liquidity, lack of near-term debt
maturities and leading position in the supermarket industry,
according to Gimme Credit analyst Craig Hutson.

"We think the company's deserving of an upgrade and has
shown a very steady to slightly improving credit profile for a
while now," he said.

Kroger has been the top supermarket operator for some time
but its performance in the recession has been especially
strong, strategists said.

"Kroger was better positioned than its peers because it had
long adopted a low pricing strategy," said Edward Mui, analyst
for independent research service CreditSights.

Consumers have sought out bargains as anxiety about job
losses and a protracted recession mounted. Consumer sentiment
fell in early July to the weakest since March, when confidence
was at a low, a Reuters/University of Michigan Surveys of
Consumers showed on Friday. For details click on
[ID:nN10403474].

"During the recession, as consumers were hunting for value,
they would go to cheaper private label products, and having the
largest percentage of private label goods of any of the food
retailers, Kroger clearly had an advantage," said Daniel Coker,
senior analyst with the capital markets research group at
Moody's Analytics.

Coker said he expects Kroger's credit spreads to move in
line with the market going forward.

The first grocer in the country with its own bakery, Kroger
has long focused on boosting its income by manufacturing much
of what it sells. It also uses an elaborate tracking system to
keep tabs on shopping patterns and target coupons to each
customer or create special promotions for different stores.

"This customer tracking data has been very effective for
marketing and in the end, these supermarket operators depend on
marketing and promotions to generate customer traffic," said
CreditSights analyst Mui. "In large part that's why Kroger has
thrived."

Standard & Poor's rates Kroger BBB-minus, the lowest
investment grade, while Moody's Investors Service and Fitch
rate it one notch higher. Kroger has said it is committed to
getting a BBB rating from all three agencies so it can access
the Tier 2 commercial paper market instead of the nonrated
market.

(Reporting by Dena Aubin, Editing by Chizu Nomiyama)