S&P MAY DOWNGRADE DEBT RATINGS

Mark Hamstra

NEW YORK -- After the three largest supermarket companies reported mediocre results for 2004 and weak outlooks for 2005, Standard & Poor's here last week said it was considering downgrading its ratings for the debt of all three.

A downgrade could make it more expensive for Kroger, Albertsons and Safeway to borrow money, analysts said.

In a conference call discussing S&P's decision to place the debt on "CreditWatch with negative implications," Mary Lou Burde, analyst, S&P, said that although the three companies can leverage the benefits of their large size and diverse geographic reach, the conditions they face are too challenging for them to show significant growth.

"Credit measures continue to be weak, despite debt-reduction efforts, and there seems to be no let-up in pressures on the industry," she said.

She cited increasing competition from nontraditional formats, especially the supercenters of Wal-Mart Stores, Bentonville, Ark., as a leading cause of the supermarket companies' woes.

"With Wal-Mart taking the lion's share of growth, it leaves little for traditional operators," she said.

While she expects the three supermarket operators to continue to make in-market acquisitions of individual stores and groups of stores to firm up their positions in their strongest markets, she also expects them to shed stores in weak markets.

In deciding whether to lower the credit ratings on the three companies, Burde said she would consider how the companies deploy their free cash flow. While all three have recently taken steps to reduce debt, she said those efforts have been insufficient to offset weak profits.

Any downgrade, which would take place within about 90 days, would be limited to one notch, she said, retaining the investment-grade ranking for all three companies. S&P currently has a long-term "BBB" rating on all three.