Fitch Ratings has revised the Outlook on Bellis Finco plc's (ASDA) Long-Term Issuer Default Rating (IDR) to Stable from Positive and affirmed the IDR at 'B+'.

A full list of ratings is below.

The revision of the Outlook reflects Fitch's expectation that the pace of ASDA's profit growth, previously supporting a deleveraging towards metrics consistent with an upgrade, will now take longer. This follows a loss of market share and decline in like-for-like (LFL) revenues which heighten execution risk in a competitive food-retail environment and require to invest more resources, thus affecting profits, to regain customers and market share, while continuing to integrate acquired businesses and deliver synergies.

The rating continues to capture ASDA's scale and positive free cash flow (FCF) generation, which would allow deleveraging if the company allocated its large cash balances to debt reduction.

Key Rating Drivers

Revised Forecast: Fitch has revised its 2024 EBITDA forecast down by GBP185 million to GBP1,056 million. This follows loss of market share, negative LFL sales over the last two reported quarters in 2024. ASDA is investing in staff hours to address product availability and customer experience issues, which we estimate has meant additional costs, while aiming to recover sales volumes.

Profit Growth Execution Risk: Our forecast continues to capture EBITDA growth of about GBP100 million per year from 2024 onwards. Achieving this will involve execution risk due to the competitive UK food retail market and cost pressures, particularly considering the upcoming GBP100 million impact from changes in the National Insurance threshold and national living wage, effective from April 2025. However, we expect these losses will be somewhat mitigated by the company's cost-saving initiatives and synergies.

Profit Growth to Continue: We expect the key profit growth drivers will be a return to positive LFL sales, scope for improved gross margins in ASDA's legacy business, operational savings to help offset cost pressures and management's planned synergies. The company has also announced a reduction in head office staff, which should generate savings.

Leverage Adequate for Rating: We anticipate EBITDAR gross leverage to remain between 5.0x-6.0x over 2024-2026, rather than reducing below 5.0x by 2025. This revised trajectory is commensurate with the current rating, but makes an upgrade unlikely over 2024-2025, so we have revised the Outlook to Stable.

Positive FCF; Improving from 2025: We expect strong positive FCF generation of around GBP300 million per year between 2025-2027, supported by continued positive working capital inflows. FCF remains suppressed in 2024 due to costs associated with IT system separation from Walmart (Project Future). We include these at around GBP300 million (including capex) in 2024.The cost of large store transition to new systems has been postponed to early 2025 and we expect it to be covered with capex funds. We expect stronger cash generation supported by working capital initiatives to be partly absorbed by higher interest costs, taxes and capex, with the FCF margin recovering to slightly above 1% from 2025.

Deleveraging Potential: ASDA has the potential to deleverage due to its cash-generation capacity, but there is uncertainty regarding the timing of near-term debt repayment from cash given lack of a forward-looking leverage target. We expect deleveraging to come from more gradual EBITDA growth, which has however slowed down. During 2024 the company already repaid some debt and will have no restrictions on prepayment of its second-lien notes or private placement from mid-2025.

Well-spread Debt Maturity Profile: ASDA's nearest debt maturity is GBP300 million notes maturing in February 2026. This is out of GBP4,500 million overall financial debt, excluding the Walmart, Inc. (AA/Stable) instrument and ground rent debt (GBP400 million). The remaining senior secured debt is due between 2028 and 2031, after the second-lien debt (GBP500 million 4% notes) due in February 2027. The upsized GBP792 million revolving credit facility (RCF) due in October 2028 benefits from springing maturity ahead of the second-lien notes if more than GBP350 million is still outstanding in October 2026.

Potential 2027 Refinancing: ASDA could repay the second-lien debt with cash, but in our view, its material size means the 2028 Walmart instrument may imply the need to refinance the whole capital structure in 2027. We treat the original GBP500 million Walmart payment-in-kind (PIK) instrument as debt because its maturity is before senior secured debt. Walmart accrues PIK interest and under the documentation must pay at least GBP900 million, or an estimated 10% of equity value on maturity unless ASDA is subject to an IPO beforehand, whereby Walmart would receive up to 10% of diluted equity.

Larger Business Scale: ASDA is larger and more diversified following its recent acquisitions. We forecast 2025 EBITDAR around GBP1.5 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 it is focused on value and investments in price. ASDA holds the number-two position in online grocery sales in the UK, accounting for around 17% 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 some broad comparability between ASDA's and Market Holdco 3 Limited's (Morrisons; B/Positive) businesses and competitive environment with operations focussed in the UK, but the EG business acquisition enhanced ASDA's scale and increased its diversification compared with Morrisons giving ASDA a comparably stronger business profile. However, ASDA has experienced a LFL sales decline in a very competitive UK grocery market, while Morrisons has been able to protect its market share over the last 12 months.

Morrisons has stronger vertical integration, which supports profitability, and a slightly higher portion of freehold assets. A growing convenience channel presents execution risk for both companies. ASDA benefits from a stronger online market share than Morrisons.

We expect around a 0.5x lower EBITDAR leverage for ASDA against Morrisons by 2026, both ranging between 5x-6x. 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 around 6.0x at end-March 2027.

Key Assumptions

Fitch's Key Assumptions Within our Rating Case for the Issuer

Recovery to positive LFL non-fuel sales growth in 2025. Low single digits sales growth for non-fuel revenues in 2025-2027

EBITDA margin to improve to 4.0% in 2024 from 3.7% in 2023, trending to 5% by 2027 as volumes recover, cost-savings initiatives help offset cost pressures, while delivering synergies

Capex at GBP350 million in 2024, followed by an average GBP560 million per year in 2025-2027

Annual working capital cash inflow of GBP40 million in 2024, followed by GBP150 million in 2025 and GBP100 million per year in 2026-2027; mainly driven by payable days improvement and returning to LFL sales growth

Exceptional cash costs of around GBP300 million in 2024, the majority of which relate to Project Future; GBP80 million in 2025 and GBP30 million per year in 2026-2027

No dividends or major M&A activity 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 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 GBP792.7 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 81% (previously 85% for the senior secured). The senior second-lien debt (GBP500million) 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 Negative Rating Action/Downgrade

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 coverage below 1.7x on a sustained basis

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

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 coverage above 2.0x on a sustained basis

Liquidity and Debt Structure

Liquidity is adequate, with a forecast of around GBP0.5 billion cash on balance sheet (after GBP190 million adjustment for working-capital seasonality by Fitch) and an undrawn RCF of GBP0.8 billion at end-2024.

We project ASDA's cash balances to increase 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, but actioning will depend on the company's capital allocation decisions.

ASDA's debt maturity profile is well spread, with near-term debt maturities comprising GBP300 million senior secured notes (mainly due February 2026), GBP500 million second-lien debt (due 2027), followed by a GBP166 million term loan A due in 2028 and the majority of debt being GBP2,850 million due between 2030 and 2031. The RCF benefits from springing maturity ahead of the second-lien notes if more than GBP350 million is still outstanding in October 2026.

Issuer Profile

ASDA is the third-largest supermarket chain in the UK, with around 12.5% market share in Great Britain. It employs around 145,000 people, operates around 1,200 total stores as of January 2024 vs 623 in 2020.

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

Bellis Finco plc has an ESG Relevance Score of '4' for Group Structure 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.

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