Moody's Investor Service, February 6, 2014 report: "Rating Action: Moody's assigns B1 CFR to acquirer of PetSmart"

Source: Moody's Investor Service, February 6, 2014 report

Rating Action: Moody's assigns B1 CFR to acquirer of PetSmart

Global Credit Research - 06 Feb 2015

Approximately $6.2 billion of rated debt securities affected

New York, February 06, 2015 -- Moody's Investors Service today assigned a B1 Corporate Family Rating, B1-PD Probability of Default Rating and a SGL-1 Speculative Grade Liquidity to Argos Merger Sub Inc., the acquirer of PetSmart, Inc. (collectively, "PetSmart"). Moody's also assigned a Ba3 rating to the company's proposed $4.3 billion senior secured term loan and a B3 rating to its proposed $1.9 billion senior unsecured notes. The ratings outlook is stable.

On December 14, 2014, PetSmart announced that it entered into a definitive agreement to be acquired by a consortium led by BC Partners, Inc. for $83.00 per share in cash, with the transaction valued at approximately $8.7 billion. The transaction is expected to close in the first half of 2015, subject to shareholder vote, as well as customary regulatory and closing conditions.

The transaction is expected to be funded with proceeds from the proposed $4.3 billion term loan, $1.9 billion of senior unsecured notes, and approximately $2.1 billion of equity, including new contributed by the BC Partners consortium and approximately $250 million of rollover equity from an existing investor. The ratings are subject to completion of the transaction as proposed and review of final documentation. Upon completion of the transaction, Argos Merger Sub Inc. will be merged with and into PetSmart, Inc., with PetSmart, Inc. being the surviving entity and obligor under the credit facilities.

"At around 7.25 times, PetSmart's initial pro forma lease adjusted leverage is very high," stated Moody's analyst, Mike Zuccaro. "However, the pet food, services and supplies industry has very stable growth characteristics, and given PetSmart's strong and defensible market position, we expect operating performance to remain relatively stable in the near to intermediate term. When coupled with cost savings initiatives and the our expectation that the company will use free cash flow for debt reduction, we expect PetSmart's leverage to fall below 6.0 times within the next 18-24 months after the close of the transaction."

The following ratings are assigned:

- Corporate Family Rating at B1

- Probability of Default Rating at B1-PD

- Proposed $4.3 billion Senior Secured Term Loan maturing 2022 at Ba3 (LGD 3)

- Proposed $1.9 billion Senior Unsecured Notes maturing 2023 at B3 (LGD 5)

- Speculative Grade Liquidity Rating at SGL-1

RATINGS RATIONALE

PetSmart's B1 Corporate Family Rating favorably reflects the company's position as the largest specialty retailer of pet food, supplies and services, with a highly defensible market position given the sizeable level of exclusive products and services it offers, well known brand, and broad national footprint. The pet products industry in general remains relatively recession-resilient, driven by factors such as the replenishment nature of consumables and services and increased pet ownership, driving the company's ability to sustainably grow revenue, expand profitability, and generate positive free cash flow. The rating is also further supported by the expectation for very good liquidity, as internally generated cash is expected to be sufficient to cover cash flow needs over the next twelve months, including sizeable interest expense, working capital and capital spending, with excess used for debt reduction.

The B1 rating also reflects PetSmart's high debt load stemming from the proposed acquisition of the company, which drives its very high pro forma leverage and weak interest coverage, as well as concerns surrounding the private equity ownership which gives rise to event risk surrounding shareholder-friendly financial policies.

The Ba3 rating on PetSmart's proposed $4.3 billion senior secured term loan reflects the a first priority lien on substantially all domestic assets of the company except cash, accounts receivable and inventory, on which it has a second lien behind the proposed $750 million ABL revolver (not rated by Moody's). The term loan also benefits from a first lien pledge on 65% of the stock of first-tier foreign subsidiaries, and from a sizeable level of unsecured debt in the capital structure. The B3 rating on PetSmart's proposed $1.9 billion senior unsecured notes reflects the junior position in the capital structure behind the sizeable level of secured debt.

The stable outlook reflects Moody's expectation for significant improvement in debt protection metrics over the next two years driven by continued steady earnings growth and debt reduction.

Given the company's very high pro forma leverage and private equity ownership, a ratings upgrade is not likely over the near term. However, over time, sustained growth in revenue and profitability while demonstrating conservative financial policies, including the use of free cash flow for debt reduction, could lead to a ratings upgrade. Quantitatively, ratings could be upgraded if the company sustainably reduces lease adjusted debt/EBITDA to near 5.0 times and if EBITA/interest expense is sustained above 2.0 times while maintaining good overall liquidity.

PetSmart's ratings could be downgraded if it were to see a material reversal of sales trends or if operating margins were to erode, indicating that the company's industry or competitive profile was weakening. Ratings could also be lowered if the company's financial policies were to become more aggressive, such as maintaining high leverage due to shareholder-friendly activities. Quantitatively, a ratings downgrade could occur if it appears that leverage will be sustained above 6.0 times or interest coverage less than 1.5 times.

PetSmart, Inc., with headquarters in Phoenix, Arizona, is the largest specialty retailer of supplies, food, and services for household pets. The company currently operates 1,387 stores in the U.S. and Canada. Revenue for the twelve months ending November 2, 2014 exceeded $7.0 billion.

The principal methodology used in these ratings was Global Retail Industry published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael M. Zuccaro
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Ann Hofferber
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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