Woolworths safe from S&P cut

The ratings agency is prepared to give Woolworths time to prove its restructure strategy.

S&P has joined Moody’s in declaring Woolworths safe from an immediate ratings cut, following this week’s restructure update.

The retailer detailed $959 million worth of impairments on Monday, which will be recognised in its full-year accounts next month, bringing its total charges for the year above $4 billion.

It represents a sizeable shake-up to the group’s balance sheet but both Moody’s and S&P – which have cut Woolworths’ debt rating once already this year – are prepared to offer the retailer time to see if its new strategy can deliver positive sales momentum.

“We consider the restructuring across the group’s supermarkets and Big W discount department store businesses, together with the slowdown in the group’s store rollout program, to be an important step toward improving the operating efficiency and sales productivity of both businesses,” S&P said in a statement.

“However, given the significant execution challenges and heightened competitive environment for both businesses, we expect the company’s operating performance to remain weak in the near term, with any material earnings improvement unlikely until at least calendar 2017.”

The base case scenario envisaged by the ratings agency has Woolworths operating with a risk profile representative of a ‘BBB’ rated entity through at least fiscal 2017, with the retailer’s restated commitment to a “solid investment grade rating” lending confidence it will shore up its financial profile should results disappoint.

“[Woolworths] retains sufficient flexibility over its cash dividend payments and non-core asset sales to manage its financial profile in line with expectations for the current rating,” S&P said.

“Accordingly, the rating anticipates that these sources of flexibility would be exercised if required over the next 12-18 months to support the group’s ‘BBB’ long-term credit profile.”

The commentary comes on the heels of Moody’s confirmation it would leave Woolworths’ rating unchanged until at least its full-year results on August 25.

“Cash costs and the lower expected (pre-tax earnings) are credit negative, but the strategy and actions announced are supportive to the company’s credit profile and the removal of capitalised leases from the company’s balance sheet will have a positive impact on Moody’s adjusted debt/EBITDA metric,” Moody’s vice president Ian Chitterer said.

“Consequently, we do not view the update to impact Woolworths’ rating or outlook.”

Woolworths shares have gone on a roller-coaster ride this week, surging over 8 per cent on Monday before slumping 3.2 per cent the day after as analysts questioned the extent of the group’s recent rally off a 10-year low.

At 3pm (AEST), Woolworths shares were trading flat at $23.42.