S&P Global Rating placed the debt ratings of Kohl’s under review with negative implications after the retailer announced that it entered into exclusive negotiations for a sale to Franchise Group, Inc. (FRG).
The CreditWatch negative placement reflects the elevated likelihood that S&P will lower its long-term issuer credit rating on the company.
S&P noted that FRG has indicated the purchase would be financed mainly through the sale of Kohl’s real estate assets.
S&P wrote, “The transaction values Kohl’s equity at about $8 billion, and we expect a majority of the financing will be provided on the basis of the real estate assets of Kohl’s Corp., according to FRG. The likelihood of the deal closing is unclear amid growing profit pressure for a wide swath of retailers and volatile capital markets. Still, in our view, if such a deal materializes between Kohl’s and FRG, it would leave Kohl’s more leveraged with less asset protection from its valuable real estate. Furthermore, if this deal is not completed, we believe Kohl’s could reconsider other bids that may also prove to be leveraging events.
“Kohl’s has seen swings in performance amid the pandemic since 2020 and has cut its guidance for the remainder of fiscal 2022 as high inflation continues to crimp consumer demand and complexities in managing inventory levels across the sector affects operating margins.
“Kohl’s S&P Global Ratings-lease adjusted leverage through the latest 12 months ended April 30, 2022, was 2.5x. Kohl’s reported a net value of about $7.8 billion of property and equipment on its balance sheet as of April 30, 2022. We will closely monitor the details of the financing package and pro forma organizational structure as they are clarified but expect net leverage to increase as part of this transaction.
“We expect to resolve the CreditWatch negative placement following more clarity on the status of FRG’s acquisition and a detailed review of the proposed capital structure and financial policy. We believe a multi-notch downgrade is possible as a result of FRG’s proposed acquisition. If this transaction does not move forward, we will review the likelihood of another sale transaction, as well as Kohl’s business prospects and future financial policy in resolving or updating the CreditWatch listing.”
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