Life has been difficult for Woolworths in recent years; its main competitor, Coles, has got its act together and is proving to be a worthy competitor; Aldi is chipping away with plain-packaged groceries; management has been distracted by the Masters hardware debacle.
The ratings agencies are also having a crack. Woolworths has an investment-grade credit rating but it is now only two rungs above a sub-investment grade rating. To be rated “investment grade”, a company must have a credit rating above BB+ from Standard & Poor’s or above Ba1 from Moody’s. Woolworth’s senior debt is now rated BBB (S&P)/Baa2 (Moody’s) after having suffered the latest downgrade from S&P. Previously its rating was BBB+. Moody’s downgraded Woolworths at the beginning of March in a similar fashion, reducing Woolworth’s rating from Baa1.
According to S&P, continued market share losses in Woolworth’s core supermarket business, declining Big W revenue and an expectation Woolworths will lower prices and spend more on service levels have led to the lower credit rating. The one bright note is S&P’s attachment of a “stable outlook” to this latest credit rating, which indicates the agency does not think another downgrade will be warranted any time soon.
Credit ratings are important as investors use them in assessing the trade-off between risk and return on a range of securities, especially bonds and other debt instruments. As a general rule, a lower credit rating will lead to a higher interest rate payable on a company’s debt. This latest decision by S&P will likely lead to a higher interest bill for Woolworths.