DBRS Morningstar Confirms George Weston Limited at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and Notes & Debentures rating of George Weston Limited (George Weston 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 with Stable trends. The confirmation is concurrent with DBRS Morningstar’s upgrade to Loblaw Companies Limited’s (Loblaw) ratings to BBB (high) from BBB (see DBRS Morningstar’s press release dated September 17, 2020) as well as DBRS Morningstar's upgrade to Choice Properties Real Estate Investment Trust (Choice) ratings to BBB (high) from BBB (see DBRS Morningstar's press release dated September 17, 2020).

The confirmation of George Weston's ratings is based on (1) the Company’s position as the holding company of Choice (approximately 61.5% ownership); (2) the Company's position as the holding company of Loblaw (approximately 52.0% ownership); and (3) the Company’s ownership of Weston Foods, combined with (4) the strength of George Weston's credit metrics and liquidity profile.

Based on each subsidiary’s contribution to George Weston’s available cash flow, adjusted for George Weston’s ownership interest in each respective entity and a one-notch penalty for the structural subordination on the leveraged cash flows received from Loblaw and Choice, DBRS Morningstar calculated a weighted-average (WA) subsidiary rating of BBB. DBRS Morningstar combined this weighted-average subsidiary rating with the assessment of George Weston’s financial and liquidity profile, which DBRS Morningstar views as strong for the rating, based on key credit metrics calculated using the Company’s deconsolidated debt (adjusted for its preferred shares) and interest expense versus earnings from Weston Foods in combination with dividends received from Loblaw and distributions received from Choice (i.e., adjusted debt to EBITDA of 1.01 times (x) as well as EBITDA coverage of 9.80x at the end of the last 12 months ended June 13, 2020), as well as the Company's cash flows and growing cash balance (i.e., more than $750 million in cash on hand as at June 13, 2020).

Given the structural subordination and the aforementioned WA subsidiary rating, the ratings of George Weston remain unchanged at BBB. DBRS Morningstar notes that due to the structural subordination, as long as the ratings on Loblaw and Choice are BBB (high), without a fundamental improvement to the credit risk profile of Weston Foods, the ratings on George Weston are effectively constrained at the BBB level. Conversely, a downgrade of George Weston's ratings would likely only occur if Loblaw and Choice were downgraded and the credit risk profile of Weston Foods deteriorates to below the BBB level at the same time, or if George Weston's financial and liquidity profile weakens substantially.

For details on Choice’s and Loblaw's credit risk profile and operating performance, please reference the respective press releases and rating reports, which can be found on dbrsmorningstar.com.

With regards to Weston Foods, DBRS Morningstar expects operating results to recover, benefitting from meaningful cost-saving initiatives combined with the transient nature of most of the negative effects related to the Coronavirus Disease (COVID-19) pandemic, including the temporary closure of grocer’s in-store bakeries and displays. DBRS Morningstar forecasts Weston Foods’ revenues for the full-year 2020 to decline to approximately $2.10 billion (benefitting from a 53rd week in the year) from $2.16 billion in 2019, given the material decline in sales experienced primarily during Q2 2020 as a result of the temporary closure of in-store bakeries and displays and restrictions on restaurants, but recover toward $2.20 billion in 2021 as volumes normalize. DBRS Morningstar expects EBITDA margins to remain suppressed on a full-year 2020 basis, with lower operating leverage and coronavirus pandemic-related costs more than offsetting cost saving initiatives. That said, DBRS Morningstar expects EBITDA margins to fully recover in 2021, benefitting from more normalized volumes combined with cost savings related to organizational effectiveness, procurement, and network optimization. As such, DBRS Morningstar forecasts Weston Foods’ adjusted EBITDA to decline to approximately $150 million for the full-year 2020 from $223 million in 2019 but recover toward $250 million in 2021.

DBRS Morningstar expects George Weston’s financial profile to remain relatively stable over the medium term based on its stable balance sheet debt, solid cash flows (including distributions from Loblaw and Choice), and growing cash balance. George Weston’s cash flow from operations (comprising Weston Foods earnings; distributions from Choice; and dividends from Loblaw net of taxes, interest, and corporate costs) should grow in line with earnings and distribution growth. Weston Foods’ capital expenditures (capex) are expected to decline slightly to approximately $185 million in 2020, while George Weston’s common and preferred dividends are expected to increase toward $400 million. Consequently, DBRS Morningstar believes George Weston will continue to generate solid levels of free cash flow. DBRS Morningstar notes that on February 25, 2020, the Company announced it would commence participation in Loblaw’s share buyback program while maintaining its majority ownership. As such, George Weston is expected to receive approximately $400 million in additional cash flows from the sale of a portion of its shares in Loblaw, which, combined with the Company’s free cash flow, is expected to grow the Company’s cash balance to approximately $2.0 billion over the next few years. DBRS Morningstar expects the Company to use its cash to continue to invest in growth—organic or through acquisitions—and to further increase returns to shareholders. As such, DBRS Morningstar believes that George Weston’s credit metrics will improve moderately over the medium term, in line with EBITDA growth (including distributions from Loblaw and Choice), and remain strong for the current rating.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Consumer Products Industry (July 30, 2020), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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@dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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

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