This action follows the Company's announcement that it has entered into a definitive agreement to acquire
KEY CREDIT RATING CONSIDERATIONS
The rating actions reflect Morningstar DBRS' expectations that Home Depot's strong free cash flow generating ability and prudent financial management will support its deleveraging plan, such that debt-to-EBITDA leverage returns toward the Company's publicly stated leverage target of 2.0x over a 24-month period, from pro forma leverage of approximately 2.5x at the close of the Transaction. Furthermore, Morningstar DBRS views the effects of the Transaction on Home Depot's business risk profile to be moderately positive. SRS, with its 760-branch network across 47 states and a fleet of more than 4,000 trucks, serves professional (PRO) customers in three different verticals, including landscapers, roofers, and pool contractors. This scale and market position should help Home Depot to further consolidate its leading market position in the PRO segment. Home Depot believes the Transaction increases its total addressable market size by
On
CREDIT RATING DRIVERS
Looking ahead, Morningstar DBRS may take a negative credit rating action if weaker-than-expected operating performance and/or more aggressive financial management policies results in credit metrics to weaken on a sustained basis (i.e., debt-to-EBITDA leverage above 2.5x).
Conversely, and although highly unlikely given the economic climate and near-term increase in leverage, if Home Depot's earnings profile were to improve considerably and/or capital allocation were managed such that key credit metrics improve to levels considered strong for the current rating (i.e., debt-to-EBITDA leverage is maintained structurally well below 2.0x), Morningstar DBRS may take a positive credit rating action.
EARNINGS OUTLOOK
Morningstar DBRS believes Home Depot's earnings profile will improve modestly within the current 'A' credit rating category, assuming benefits from a successful integration of the SRS business, which reported revenues and adjusted EBITDA of approximately
FINANCIAL OUTLOOK
In terms of financial profile, Morningstar DBRS acknowledges a temporary increase in leverage post transaction close but expects key credit metrics to return to current levels, which are considered comfortable for the current rating category, within 24 months from the transaction close. Morningstar DBRS forecasts pro forma debt-to-EBITDA leverage to increase towards 2.5x at the close of the transaction from 2.0x in F2023, as the Company is likely to raise around
CREDIT RATING RATIONALE
Home Depot's credit ratings are supported by its dominant market position, large scale, geographic diversification, and free cash-generating capacity. The credit ratings also reflect the intense competition and cyclicality of the home improvement retail industry as well as risks related to possible future growth strategies.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (
BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of
(B) Weighting of FRA Factors
In the analysis of
(C) Weighting of the BRA and the FRA
In the analysis of
Notes:
All figures are in
Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Companies in the Merchandising Industry (
The following methodologies have also been applied:
DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (
DBRS Morningstar Criteria: Guarantees and Other Forms of Support (
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.
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