DBRS Confirms George Weston Limited at BBB, Stable, after Announced Ownership Change of Choice Properties

DBRS Limited (DBRS) confirmed the Issuer Rating and Notes & Debentures rating of George Weston Limited (GWL or the Company) at BBB as well as its Short-Term Issuer Rating at R-2 (high) and its Preferred Shares rating at Pfd-3. All trends are Stable. DBRS notes that it has concurrently confirmed the ratings of Loblaw Companies Limited (Loblaw) at BBB with a Stable trend and Choice Properties Real Estate Investment Trust (CPREIT or Choice Properties) at BBB with a Stable trend.

The confirmation of the ratings follows the announced reorganization by Loblaw and GWL, under which Loblaw will spin out its 61.6% interest in CPREIT. Loblaw shareholders (excluding GWL) will receive 0.135 of a GWL common share for every Loblaw share, which is equivalent to the market value of their pro-rata interest in Choice Properties. GWL will issue approximately 26.7 million common shares to Loblaw minority shareholders and will receive Loblaw’s 61.6% interest in CPREIT (the Transaction). Following the Transaction, GWL will own 65.4% of Choice Properties directly, including its previously owned 3.8% interest. The plan will require the approval of at least 66 2/3% of Loblaw common shareholders and a majority of Loblaw minority shareholders. Voting is expected to take place in October 2018 and, while the Transaction is subject to customary closing conditions, the Company expects the Transaction to close in Q4 2018.

After the Transaction, DBRS will use continue to use its “DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries” and “Rating Companies in the Consumer Products Industry” for GWL’s ratings, in conjunction with the applicable methodologies for each subsidiary (“Rating Companies in the Merchandising Industry” for Loblaw and “Rating Entities in the Real Estate Industry” for CPREIT and Rating Companies in the Consumer Products Industry for Weston Foods). DBRS calculates a weighted-average (WA) subsidiary rating based on each subsidiary’s contribution to consolidated cash flow, adjusted for GWL’s ownership interest in each entity and reflective of structural subordination on the levered cash flows received from Loblaw and Choice Properties. As a result, the WA subsidiary rating reflecting structural subordination is BBB (low).

DBRS assesses GWL’s financial and liquidity strength based on key credit metrics calculated using its debt and preferred shares, related preferred dividends and interest expense (unconsolidated) alongside its adjusted EBITDA and cash flows. GWL’s-adjusted EBITDA and cash flows as calculated by DBRS comprise dividends received from Loblaw, distributions received from CPREIT and the adjusted EBITDA/cash flow from operations from Weston Foods. DBRS also considers GWL’s cash on hand and net debt. GWL’s current Issuer Rating of BBB reflects the WA subsidiary rating of BBB (low), supported by the strength of GWL’s credit metrics and liquidity (i.e., lease-adjusted debt-to-EBITDAR of 1.35 times (x) and lease-adjusted EBITDA coverage of 10.76x in 2018).

DBRS notes that any potential future rating upgrade to BBB (high) on Loblaw or Choice Properties will not likely result in a corresponding rating action on GWL’s ratings.

GWL’s liquidity remains adequate for its current exceptional R-2 (high) Short-Term Issuer Rating based on its sizable cash on hand and short-term investments as well as its liquid ownership interests in Loblaw and CPREIT, its cash-generating capacity and its manageable debt levels.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, Rating Companies in the Merchandising Industry, Rating Entities in the Real Estate Industry, Rating Companies in the Consumer Products Industry and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.