Fitch Ratings has assigned Bellis Acquisition Company Plc's new senior secured notes (SSN) and new term loans B (TLB) final ratings of 'BB' with Recovery Ratings of 'RR2'.

A full list of rating actions is below.

Bellis Finco plc's (ASDA) Long-Term Issuer Default Rating (IDR) is 'B+'/Positive, reflecting sound cash flow generation for 2024-2027, with a good likelihood of deleveraging to below 5.0x by 2025.

The GBP2,850 million of new debt, comprising a GBP1.1 billion euro-equivalent new TLB and GBP1.750 billion SSNs, ranks equally with ASDA's existing senior secured debt. The proceeds were used to repay existing debt, in addition to around GBP315 million repayment from cash on balance sheet.

Key Rating Drivers

Refinancing Risk Addressed: The group has now refinanced GBP2,850 million of its overall GBP4,500 million remaining financial debt (excluding Walmart instrument and ground rent). The debt reduction from cash (net of GBP50 million transaction costs) slightly improves leverage metrics but is offset by our revised treatment of the Walmart instrument. The refinancing only leaves GBP300 million existing SSN due in February 2026, which ASDA could repay with cash or refinance closer to maturity, while the rest of senior secured debt is due between 2028 and 2031. We expect higher interest costs of near GBP375 million in 2025.

New Debt Matures After Second-lien: The new SSN and TLB mature in 2030 and 2031, respectively, after the second-lien debt (GBP500 million 4% notes) due in February 2027 and the GBP684 million private placement with Apollo (due in October 2029). ASDA could repay the second-lien debt with cash, but the 2028 Walmart instrument, in our view, may imply the need to refinance the whole capital structure in 2027. The new upsized GBP747 million revolving credit facility (RCF), extended to October 2028, benefits from springing maturity ahead of the second-lien notes if more than GBP350 million is still outstanding in October 2026.

Profit Growth Execution Risk: Our overall EBITDA (post rents) forecast in 2024 is near GBP1.25 billion. We see some remaining execution risk, given loss of some customers to competitors in 2023 and a competitive UK food retail market. We forecast improving gross profit margin in ASDA standalone business (excluding recently acquired EG operations and Coop stores), operating cost restraint and around GBP80 million of synergies. We forecast a near GBP300 million EBITDA uplift between 2023 and 2025, which will reduce EBITDAR leverage to below 5.0x in 2025.

Walmart Instrument Treated as Debt: We now treat the original GBP500 million Walmart PIK instrument as debt because its maturity is ahead of the refinanced debt, as opposed to equity previously. The latter was because the instrument is deeply subordinated and its effective redemption date in February 2028 was after the existing senior secured debt. Walmart senior shares accrue PIK interest and under the documentation must pay at least GBP900 million, or an estimated 10% of equity value on maturity unless it is subject to an IPO beforehand whereby Walmart would receive up to 10% of diluted equity.

Deleveraging Potential: We believe ASDA has the potential to deleverage due to its cash- generation capacity but gross debt reduction has been limited since its LBO in 2021. Prior to today's refinancing it has only partly repaid its term loan A and fully repaid its GBP200 million bridge facility (used to fund its acquisition of Co-Op stores). We expect deleveraging towards 5.0x by 2024 to come from EBITDA growth rather than further voluntary debt repayments.

Positive FCF; Improving from 2025: We expect positive free cash flow (FCF) generation to 2028, but suppressed in 2024 due to costs associated with IT restructuring linked to 'Project Future'. At around GBP290 million (including capex), 'Project Future' costs in 2024 are now around GBP130 million higher than previously expected. As this project completes, we expect stronger cash generation to be partly absorbed by higher interest cost, taxes and capex, with the margin recovering to slightly above 1% from 2025.

Larger Business Scale: ASDA is now of a larger scale and more diversified following acquisitions. We forecast 2025 EBITDAR will exceed GBP1.7 billion, which maps to a 'bbb' category score for scale under our Food Retail Navigator.

Resilient Food Retail Demand: ASDA has a strong business model in a resilient but competitive UK food retail sector. It has a good brand and has stabilised its market share due to its focus on value and investments in price. ASDA holds the number-two position in online grocery sales in the UK, accounting for around 16% of its food and clothing sales in 2023.

Derivation Summary

Fitch rates ASDA using its global Food Retail Navigator. The acquisition of EG Group's UK operations increased ASDA's scale, broadened its diversification and improved its market position, although it is still weaker than that of other large food retailers in Europe, such as Tesco plc (BBB-/Stable) and Ahold Delhaize NV.

Fitch views ASDA's and Market Holdco 3 Limited's (Morrisons; B/Positive) business profiles as broadly comparable. However, the EG business acquisition - which has enhanced ASDA's scale and increased diversification - and recent like-for-like (lfl) sales growth have put its business profile slightly ahead of Morrisons. Both Morrisons' and ASDA's operations remain focused in the UK.

Morrisons has stronger vertical integration that supports profitability and a higher portion of freehold assets. ASDA's recovery in lfl sales underlined some competitive advantage when consumers trade down. Nevertheless, the market remains very competitive and ASDA lost market share in 2023, which has been more stable since May 2023. A growing convenience channel presents execution risk for both companies. ASDA benefits from a stronger online market share than Morrisons.

We expect around a 1.0x difference in EBITDAR leverage between ASDA (5.0x) and Morrisons (6.0x) by 2025. This is meaningfully higher than Tesco's (around 3.5x excluding Tesco Bank), while more comparable with our projection for smaller-scale WD FF Limited's (B/Stable) leverage at slightly above 6.0x by end-March 2026.

Key Assumptions

Fitch's Key Assumptions within our Rating Case for the Issuer:

Overall group revenue to grow on average by nearly 2% in 2025-2026 from GBP27.6 billion in 2024

ASDA's standalone revenue slightly lower in 2024, due to a decline in petrol revenue (14% decline in volume). Revenue to grow on average around 2% for 2025-2027, as ex-petrol revenue growth is partly offset by slowly declining fuel volumes

Acquired EG Group UK revenue estimated at around GBP2.7 billion (2024) to grow slightly (average 1.5% p.a.) during 2025-2026

Acquired Arthur revenues estimated at near GBP900 million per year to 2027

For both acquired businesses we expect growth in grocery revenues post store conversions to the 'ASDA Express'

For both acquired businesses we expect a slight reduction in petrol pump prices, albeit together with gross profit margin per litre, remaining above ASDA legacy sites'. For EG sites we expect an uplift in fuel volumes from price reduction in 2024, followed by gradual slow declines to 2027. Volume decline to be compensated by an increase in margin, resulting in broadly flat gross profit

EBITDA margin to improve to 5.3% in 2026 from 3.7% in 2023, driven by growth of the core business, non-fuel gross profit margin improvement for core ASDA business, while containing sales, general and administrative costs, alongside around GBP80 million synergies (GBP86 million planned by management)

Annual working-capital inflow of about GBP200 million in 2024 and GB100 million per year in 2025-2026, driven by payable day improvements and better inventory management

Average capex of about GBP540 million per year in 2024-2026, on the back of notably larger operations, and growth capex to drive synergies

Exceptional costs of around GBP300 million in 2024, of which GBP270 million relate to Project Future

We treat Walmart PIK instrument (GBP500 million original amount + accrued PIK interest) as debt under the new capital structure

No dividends or major M&A activities over the next four years

Recovery Analysis

Fitch's Key Recovery Rating Assumptions:

Under our bespoke recovery analysis, higher recoveries would be realised through reorganisation as a going-concern in bankruptcy rather than liquidation. We have assumed a 10% administrative claim.

The going-concern EBITDA estimate of GBP825 million reflects Fitch's view of the a sustainable, post-reorganisation EBITDA, on which we base the enterprise valuation (EV). The assumption also reflects corrective measures taken in the reorganisation to offset the adverse conditions that trigger its default, such as cost-cutting efforts or a material business repositioning.

We apply an EV multiple of 6.0x to the going-concern EBITDA to calculate a post-reorganisation EV. This multiple is aligned with Morrisons'.

ASDA's upsized GBP747 million RCF is assumed to be fully drawn on default. The RCF ranks equally with the company's GBP4 billion senior secured debt, comprising term loans, senior secured notes and private placement. However, we have treated as super senior ASDA's ground rent of GBP400 million, which is secured by specific fixed assets and unavailable to cash-flow backed lenders in debt recovery.

Our waterfall analysis generated a ranked recovery for the senior secured notes, term loans, RCF and private placement facility in the 'RR2' band, indicating a 'BB' instrument rating, two notches higher than the IDR. The waterfall analysis output percentage on current metrics and assumptions is 85% (previously 81% for the senior secured debt pre-refinancing). The senior second lien debt (GBP500 million) is rated in the 'RR6' band with an instrument rating of 'B-', two notches below the IDR with a zero-output percentage. The Walmart instrument is subordinated and therefore does not affect the senior secured instrument recoveries.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

Continued lfl sales growth along with improvement in gross margin, successful integration of acquired businesses and delivery of synergies, plus cost savings to offset operational cost inflation, leading to growth in EBITDAR and FCF (over 1% of sales)

EBITDAR gross leverage below 5.0x on a sustained basis

EBITDAR fixed charge cover above 2.0x on a sustained basis

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

We could revise the Outlook to Stable on a lack of progress in growing earnings and improving FCF, with EBITDAR gross leverage failing to approach 5.0x in 2024 as a result

Lfl sales decline exceeding other big competitors', inability to grow profits, failure to integrate and generate synergies from acquired businesses, and 'Project Future' cost overruns leading to low-to-neutral FCF, and reduced deleveraging capacity

EBITDAR gross leverage above 6.0x on a sustained basis

EBITDAR fixed charge cover below 1.7x on a sustained basis

Failure to address upcoming debt maturities 12-15 months in advance

Liquidity and Debt Structure

Adequate Liquidity: Liquidity is adequate with a forecast of around GBP750 million cash on balance sheet (after GBP190 million adjustment for working-capital seasonality by Fitch) and undrawn RCF of GBP747 million at end-2024.

We project ASDA's cash balances to build up to 2027 due to positive FCF generation, particularly after one-off costs of 'Project Future' end in 2024. This would leave ASDA with deleveraging capacity.

Issuer Profile

ASDA is the third-largest supermarket chain in the UK operating around 1,200 stores.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS

Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.

ESG Considerations

ASDA has an ESG Relevance Score of '4' for Group Structure due to due to the complexity of the group structure with a number of related-party transactions. This has a negative impact on the credit profile, and is relevant to the rating[s] in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2024 Electronic News Publishing, source ENP Newswire