The Bon-Ton Stores, Inc.
--Issuer Default Rating (IDR) 'B'.
The Bon-Ton Department Stores, Inc.
--IDR 'B';
--Senior Secured Credit Facility 'BB/RR1';
--Senior Unsecured Notes 'CCC+/RR6'.
Bonstores Realty One and Two, LLC
--IDR 'B';
--Mortgage Loan Facility 'BB/RR1'.
The Rating Outlook has been revised to Negative from Stable. Approximately $1.2 billion of debt outstanding as of Feb. 2, 2008 is affected by these actions.
The change in Rating Outlook reflects a deterioration in the company's operating and credit metrics in 2007 with further downside potential in the near to intermediate term given an anticipated challenging operating environment in 2008. The ratings continue to reflect BONT's high financial leverage following its acquisition of Saks Incorporated's Northern Department Store Group (NDSG or Carson's) in March 2006 and sub-par operating results. These factors are balanced against BONT's successful integration of Carson's and the strengthened competitive positioning and geographic diversity of the combined organization.
BONT legacy stores (ex-Carson's), which account for approximately 34% of revenues, have posted negative comparable store sales growth for the last seven years (with the exception of 2003 when it posted a 0.9% increase) and deteriorated significantly in 2007 at negative 6.5% on top of negative 2.7% in 2006, exacerbated by poor weather conditions and a weakness in consumer spending. In addition, while Carson's generated positive comparable store sales of 4.3% in 2006, comparable store sales were down negative 1.6% in 2007 given macro factors.
The deterioration in comparable store sales has eroded operating margins, with operating EBIT margin declining to 3.6% in 2007 from 5% in 2006, including income from its credit card program. As a result, adjusted debt/EBITDAR increased to 5.6 times (x) in 2007 from 5.2x in the prior year and operating EBITDAR/interest + rents declined to 1.7x from 1.9x, over the same period, despite a $42 million reduction in debt in 2007.
While management is committed to paying down debt with free cash flow, further weakness in sales and operating margins, which in turn would reduce free cash flow levels and limit BONT's ability to reduce debt at current anticipated levels, would further weaken credit metrics.
The issue ratings shown above are derived from the IDR and the relevant recovery rating. The $1 billion senior secured credit facility is rated 'BB/RR1', indicating outstanding (90-100%) recovery prospects in a distressed scenario. The facility is secured by a first lien on substantially all of the assets of the borrowing entities and guarantors, except for certain mortgaged real property. Covenants require a minimum excess availability of $75 million and place limits on debt, dividends, and capital expenditures. The facility provides adequate liquidity to the company to handle seasonal inventory swings of approximately $275 million.
The $252 million mortgage loan facility is also rated 'BB/RR1', indicating outstanding (90-100%) recovery prospects in a distressed scenario. The facility is secured by mortgages on 23 stores and one distribution center with an appraised value of approximately $328 million as of March 2006. These properties are owned by bankruptcy-remote special purpose entities.
The $510 million of senior unsecured notes are rated 'CCC+/RR6', and are considered to have poor (0-10%) recovery prospects in a distressed scenario.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
SOURCE: Fitch Ratings
Fitch Ratings Monica Aggarwal, +1-212-908-0282 (CFA, New York) Tiffany Co, +1-312-368-3185 (Chicago) Brian Bertsch, +1-212-908-0549 (Media Relations, New York)
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