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Fitch Rates Dillard's Senior Unsecured Credit Facility 'BBB-'
May 15, 2015 / 1:41 PM / 2 years ago

Fitch Rates Dillard's Senior Unsecured Credit Facility 'BBB-'

(The following statement was released by the rating agency) NEW YORK, May 15 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to Dillard's Inc.'s (Dillard's) new $1 billion senior unsecured revolving credit facility due to mature on May 13, 2020. This replaces its previous $1 billion senior secured revolving credit facility due July 2018. Fitch currently rates Dillard's Long-term Issuer Default Rating (IDR) 'BBB-'. As of Jan. 31, 2015, Dillard's had $815 million of debt outstanding. A full list of ratings follows at the end of this release. The revolver contains financial covenants which include minimum fixed-charge coverage (EBITDAR over rent and interest expense) of at least 2.5x and maximum leverage (total debt-to-EBITDA) of 4.0x. Dillard's fixed charge coverage was 9.6x and leverage ratio 1.0x at the end of 2014 based on covenant calculations. The new revolving credit facility is unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by all of the company's U.S. subsidiaries, except the unrestricted and excluded subsidiaries as defined by the credit agreement, a structural enhancement relative to its existing unsecured debt. Other key covenants include: --Negative pledge on inventory; Total indebtedness subject to pro forma leverage of 4.0x with the ability to: --Issue secured debt (or 'Priority Debt") backed by real estate at its operating subsidiaries (including debt at Dillard's Properties, Inc.) subject to the greater of $2 billion and Priority Debt/consolidated EBITDA ratio of 2.5x; -- Issue general financing on capital expenditures not to exceed $100 million in each fiscal year; --Provide liens on purchase money and capital leases not to exceed $100 million in each fiscal year; --Sales of assets to include (a) sales of inventory in the ordinary course of business and (b) other dispositions in an aggregate amount not to exceed 50% of the book value of the consolidated total assets of the borrower and its subsidiaries; --Other usual and customary covenants for an investment grade profile. KEY RATING DRIVERS The ratings reflect Dillard's positive comparable store sales (comps) trends over the past five years, which have exceeded the industry average for most of this time frame, and an EBITDA margin that has stabilized in the 12% range over the last two years. Dillard's has significantly narrowed the gap with the strong operators that have EBITDA margins in the 13%-14% range. Fitch expects Dillard's to generate comps growth of around 1%-2% over the next 24 months and EBITDA margin to remain flat-to-modestly higher. While Dillard's credit metrics are strong for the 'BBB-' rating category with adjusted debt/EBITDAR currently at 1.1x, the ratings continue to incorporate Dillard's below industry-average sales productivity (as measured by sales per square foot) and operating profitability and geographical concentration relative to its higher rated investment-grade department store peers. Fitch expects Dillard's will continue to maintain or modestly grow its market share of the overall apparel and accessories category in the near- to intermediate-term, although long-term secular trends in the department store space remain negative and the decline in mall traffic has accelerated. Fitch expects Dillard's leverage to remain in the low-1x range over the next three years. Dillard's is the sixth largest department store chain in the U.S. in terms of sales, with retail revenue of $6.5 billion on 274 stores and 23 clearance centers in 29 states concentrated in the southeast, central and southwestern U.S. Dillard's comps have continued their positive trajectory since 2010, although growth moderated since 2013 to 1% versus the 3%-4% range between 2010 and 2012. Dillard's has experienced positive comp growth by improving its merchandise assortment towards more upscale brands, better in-store execution, and strong inventory control. The company continues to focus on closing underperforming stores, closing a net 29 units or approximately 10% of its square footage since the end of 2007. However, Dillard's annual sales per square foot at approximately $130 is significantly lower than other well-operated mid-tier department store peers, which are in the $180-$200 range (based on gross square footage) and could constrain further improvement in EBITDA margin. From a store investment perspective, capex is expected to moderately increase to around $160 million in 2015, from $152 million in 2014, versus an average of roughly $110 million in 2010 - 2013, to support increasing investments in store updates (in the higher sales generating or more productive areas of the store), online growth initiatives and some modest new store openings expected in 2015/2016. Liquidity remains strong, supported by a cash balance of $404 million as of Jan. 31, 2015, and $904 million available under its $1 billion credit facility, net of letters of credit outstanding. The company generated approximately $450 million in free cash flow (FCF; before special dividends) in 2014, the highest level since 2009, reflecting EBITDA growth and some working capital benefit. FCF generation has been approximately $400 million on average over the last five years, and Fitch expects Dillard's to maintain this level going forward, assuming modest working capital uses and a modest increase in capex. Given no debt maturities until early 2018, Fitch expects Dillard's will direct excess cash flow toward share buybacks and/or increased dividends including any one-time special dividends. The new $1 billion senior unsecured credit facility, which is due to mature in May 2020 and the $615 million of senior unsecured notes are rated at par with the IDR at 'BBB-', while the $200 million in capital securities due 2038 are rated two notches below the IDR reflecting their structural subordination. Fitch notes that Dillard's owns 88% of its retail square footage, which is unencumbered. KEY ASSUMPTIONS --Comps growth in the 1%-2% range over the next 24 months and EBITDA margin to remain flat-to-modestly higher; --Leverage to remain in the low-1x range; --FCF of approximately $400 million annually, which Fitch expects will be directed toward share buybacks and/or increased dividends including any one-time special dividends. RATING SENSITIVITIES A positive rating action could result in the event that Dillard's continues to generate above-industry-average comparable store gains and EBITDA margin improves to the 13% - 14% range. A negative rating action could result in the event of a return to negative sales trends and/or a more aggressive financial posture, leading to an increase in leverage ratio of more than 2.5x and/or reduced financial flexibility. Fitch has assigned the following rating: --$1 billion revolving credit facility 'BBB-'. Fitch currently rates Dillard's as follows: --Long-term IDR at 'BBB-'; --Senior unsecured notes at 'BBB-'; --Capital securities at 'BB'. The Rating Outlook is Stable. Contact: Primary Analyst Monica Aggarwal, CFA Managing Director +1-212-908-0282 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Biana Elman Associate Director +1-212-612-7848 Committee Chairperson Peter Molica Senior Director +1-212-908-0288 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (May 28, 2014). Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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