Moody's downgrades Stater Bros., rates note B2

Moody's Investors Service said it assigned a B2 (LGD4, 57%) rating to Stater Bros. Holdings Inc.'s new $275 million senior notes due 2015 and downgraded the company's corporate family and probability-of-default ratings to B2 from B1 and its $175 million floating-rate senior notes due 2010 and $525 million senior notes due 2012 to B2 (LGD4, 57%) from B1.

The outlook is stable.

The downgrade follows the company's announcement that it will issue $275 million of new senior notes and use $175 million of the proceeds to redeem its $175 million floating-rate notes, to purchase $15 million of class A common stock, to pay a $5 million dividend to La Cadena Investments, its sole shareholder, and to fund the additional capital expenditures for the new distribution center.

The agency said the downgrade reflects the increase in Stater's leverage to finance the construction of a new distribution facility, the cost of which is higher than Moody's had originally anticipated.

The B2 corporate family rating reflects its weak credit metrics, limited size, intense competition from larger, financially stronger retailers and operating margins that are 1% to 2% below other large supermarkets, Moody's said.

However, the agency said the rating also recognizes Stater's low product volatility, leading position in San Bernardino and Riverside counties, extended history of stability in management and strategy and predictable financial policy.

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