Aug 16 (IFR) - Five-year credit default swaps (CDS) in US
supermarket chain Safeway are trading at levels that essentially
consider the investment-grade company's debt as junk-rated bonds
- and that's unlikely to improve in the short to medium term.
Protection buying has climbed in the past three months,
pushing five-year CDS in California-based Safeway 50bp
wider as a series of business and strategic decisions have been
seen in the markets as credit negative.
It sold off some CAD4.0bn of Canadian assets in the second
quarter to help pay down debt - but rating agency Moody's
revised Safeway's outlook to negative on the move, as the
Canadian operations had a higher Ebitda margin and generated
better cash flow than their US counterparts.
And Safeway's second-quarter results, while in line with
consensus expectations, were down year-on-year.
According to data from Markit, CDS in Safeway (BBB
/BBB-/Baa3) is trading at 215bp or an implied rating of BB,
which is fully into junk-bond status.
Moody's says any improvement to the company's credit metrics
from the asset sale will only be modest, while rival agency
Fitch said the decision to pay down debt would still only bring
Safeway's leverage back to levels seen before it began an
accelerated debt-financed share buyback program in 2011/2012.
For Fitch, concerns about identical store sales over the
next few quarters are key to "stabilizing the rating outlook".
During the second quarter, identical store sales fell 1.0%
versus the year-ago period, when they increased 2.1%.
Safeway said it anticipates non-fuel same-store sales growth
of 1.5% to 2.0% for 2013, which is lower than it originally
forecast. Moreover, while inflation is expected to remain
quelled for the second half of the year, identical store sales
are expected to remain essentially flat.
Combined with an earnings per share forecast set at the
lower end of its prior outlook of $2.25 to $2.45 and the
company's intention to repurchase shares, Safeway's ability to
bolster its credit quality looks limited - which can only
increase odds in the intermediate term of an actual move into
Even so, the chain's bonds have been relatively solid in the
secondary market. The SWY 3.4% 2016s, quoted at T+151bp at the
end of May, were quoted at T+137bp on Friday.
Its 4.75% 2021s were quoted at a spread of +250 spread on
Friday - virtually unchanged from +251 on May 31.