The Bon-Ton Stores (Bon-Ton) announced its plans to refinance its 10 1/4% senior unsecured notes due March 2014 through an exchange offer, replacing them with 10 5/8% senior second-lien secured notes due July 2017. Based on Fitch's recovery analysis that places a liquidation value of $730 million under a distressed scenario as of April 28, 2012, the new senior second lien notes are expected to be rated 'CCC/RR5' while any remaining unsecured notes are likely to be downgraded to 'CC/RR6' from 'CCC/RR5'.
Assuming a majority of existing bondholders (north of 80%) convert to the 2017 notes, Fitch would likely revise the Rating Outlook for Bon-Ton to Stable from Negative, as the company's liquidity profile would improve by pushing out the nearest debt maturities to 2016.
The ratings continue to reflect below industry average comparable store sales trends and operating profitability. The company's comparable store sales trends have been negative for eight of the past 10 years, and have been consistently weaker than its peers in the moderate department store space. In 2011, comp store sales declined 3% and Fitch attributes the decline to merchandising mishaps; high apparel costs that negatively impacted consumer spending; and to market share losses to stronger peers such as Macy's which has been posting positive mid-single digit comps over the past eight quarters.
Fitch expects that leverage (adjusted debt/EBITDAR) will increase to the mid 6.0 times (x) in 2012 and be potentially higher in 2013/2014 unless Bon-Ton can reverse the negative same store sales trends. Free cash flow before any one time gains (such as $50 million one-time payment for its new credit card agreement this summer) is expect to be flat to slightly positive this year.
Fitch currently rates Bon-Ton as follows:
The Bon-Ton Stores, Inc.
--Issuer Default Rating (IDR) 'B-'.
The Bon-Ton Department Stores, Inc.
--IDR 'B-';
--$625 million senior secured credit facility 'BB-/RR1' from 'BB/RR1';
--$464 million senior unsecured notes 'CCC/RR5' from 'B-/RR5'.
Bonstores Realty One and Two, LLC
--IDR 'B-';
--$230 million mortgage loan facility 'B/RR3'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', dated Aug. 12, 2011;
--'Evaluating Corporate Governance' (Dec. 13, 2011);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers', dated May 12, 2011;
--'Analysis of U.S. Corporate Pensions', dated Aug. 5, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677740
Analysis of U.S. Corporate Pensions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.
Contacts:
Fitch Ratings
Primary Analyst:
Monica Aggarwal, CFA,
+1-212-908-0282
Senior Director
One State Street Plaza
New
York, NY 10004
or
Secondary Analyst:
Isabel Hu,
+1-212-908-0672
Associate Director
or
Media Relations:
Brian
Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com