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Fitch Downgrades Home Depot's IDR to 'BBB+'; Outlook Negative
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded its ratings on The Home Depot, Inc. (Home Depot) as follows: --Issuer Default Rating (IDR) to 'BBB+' from 'A-'; --Bank facility to 'BBB+' from 'A-'; --Senior notes to 'BBB+' from 'A-'. The short-term IDR is affirmed at 'F2'. Approximately $11.7 billion of debt is affected by these actions. The Rating Outlook is Negative. The downgrades reflect Home Depot's lower sales and earnings guidance and the impact to the company's credit metrics. The ratings also consider a more shareholder-friendly financing strategy balanced by the company's leading market position and strong cash flow generation. The Negative Outlook considers the possibility of continued weakness in the operating environment in the medium term and the longer term effect on the company's sales and operating margins. Home Depot revised its earnings guidance based on its outlook of a more challenging operating environment in the second half of 2007, which could extend into the first half of 2008. Driven by anticipated weaker comparable store sales in the second half of 2007 and seven to 10 fewer store openings than originally planned, Fitch expects the company's retail sales to decline slightly in fiscal 2007. In addition, operating margin is expected to decline by over 100 basis points, which would constrain the company's profitability. Additionally, Home Depot has changed its financing strategy to one of facilitating capital distribution. The company is adopting a more aggressive dividend policy with a 30% dividend payout. In addition, management is adopting a more aggressive share repurchase policy in the form of a $22.5 billion share repurchase program to be executed as soon as practicable. The company recently announced a tender offer for the purchase of 250 million shares, the second largest tender offer in the company's history, which is scheduled to expire on Aug. 16, 2007. The tender price range is $39.00 to $44.00 per share, which represents a value of approximately $9.8 billion to $11 billion. The share repurchases will be funded with proceeds from the sale of the HD Supply business, which is estimated to be $9.5 billion, existing cash, and an additional $12 billion of debt. As a result of the company's weaker operating performance; the sale of the HD Supply business to Bain Capital Partners, The Carlyle Group, and Clayton Dubilier & Rice, which is expected to reduce revenues and operating profit by approximately $12 billion and $800 million, respectively; and the company's commitment to debt-financed share repurchases, Fitch expects credit metrics to weaken in the near to medium term. The latest 12 months ending April 29, 2007 total adjusted debt/EBITDAR increased to 2.7 times (x) on a pro forma basis, as compared to 1.6x without the additional debt. Of ongoing concern is the possibility that a correction in the housing market may take longer than expected, which would further pressure Home Depot's operating performance. This is balanced by the company's leading market position as the largest home improvement retailer and strong cash flow generation of approximately $1 billion in free cash flow. 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. |
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