Morrisons’ credit rating has been downgraded in response to disappointing sales and profits at the private equity-owned supermarket.
Moody’s cut the retailer’s existing ‘junk’ rating from B1 to B2 and changed the outlook on its £7.5bn debt pile from ‘stable’ to ‘negative’.
The ratings agency said the downgrade was triggered by the company’s “operating underperformance” in the year ended 30 October 2022.
The results published last month – where annual sales fell 4.2% and adjusted EBITDA declined 15% to £828m – put the group’s leverage at 9.1x debt to EBITDA.
Moody’s added it expected leverage to improve from recent levels over the next 12 to 18 months, but that it would remain significantly above the agency’s expectation of below 6.5x for the previously assigned B1 rating.
Profit growth over the next two years would also be hampered by restructuring and other exceptional costs, relating to the integration of McColl’s and the implementation of a synergy and efficiency programme, Moody’s said.
However, the ratings agency did note comments by Morrisons CEO David Potts that sales had been on a “steadily improving trend”, with the decline slowing and sales up 2.5% over the three-week Christmas period, while market share also stabilised as revealed in the latest Kantar data.
Moody’s said the trends suggested “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”.
Morrisons has been under pressure since the £7.1bn debt-fuelled takeover by Clayton Dubilier & Rice (CD&R) in 2021. The group lost its place as the UK’s fourth biggest supermarket to Aldi last year as sales faltered throughout the cost of living crisis despite soaring prices.
“The B2 rating considers the company’s relatively smaller scale and greater loss of market share to the discounters during the first half of fiscal 2022 compared to the other three ‘big four’ UK grocers,” Moody’s added.
Moody’s also noted an “aggressive financial strategy, high leverage, and its majority private equity ownership” in the rationale for the downgrade.
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