Woolworths Ltd. had its credit rating downgraded by Moody’s Investors Service less than a week after naming a new boss to try to reverse the supermarket chain’s losses.
The Australian food retailer had its credit score lowered one level to Baa2, two steps above junk, Moody’s said in a statement Wednesday. The outlook remains negative and the rating could be cut again if conditions deteriorate further or the company incurs greater-than-expected costs as it extricates itself from the home improvement business.
The Sydney-based company last week announced its first loss since listing in 1993. It also named Brad Banducci as chief executive officer, more than eight months after Grant O’Brien announced he was quitting. Banducci, who was head of Woolworths’ food group, faces the challenge of bolstering sales growth, which has lagged behind that of Wesfarmers Ltd.’s Coles chain. He’ll also have to navigate the company’s exit from home-improvement venture Masters.
"The downgrade principally reflects Woolworths’ continued operational challenges across much of its portfolio," according to Moody’s analyst Ian Chitterer.
The company reported a loss of A$972.7 million ($700 million) for the six months ended December 31 as it recognized a A$3 billion impairment charge related to Masters. That compared to a profit of A$1.28 billion a year earlier.
While the decision to get out of home improvement is a "long-term positive from a credit perspectiv" it’s likely to require a lot of management attention and there is a risk that it could end up eating up more cash than currently expected, according to Moody’s.
Woolworths has been the fifth-worst performer in the iTraxx Australia index of credit default swaps over the past year, with the cost of insuring its debt climbing 121 basis points to 176 basis points as of Tuesday, according to CMA prices. The company shed more than a quarter of its equity-market value over the same period and the share price was at A$22.60 as of 10:08 a.m. on Wednesday in Sydney.
Standard & Poor’s currently rates Woolworths BBB+ with a negative outlook, the equivalent of one level higher than Moody’s.
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