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Investing.com -- Moody’s Ratings has downgraded Advance Auto Parts (NYSE:AAP), Inc.’s corporate family rating to Ba3 from Ba1 while maintaining a negative outlook, citing increased debt levels following the auto parts retailer’s planned new notes issuance.
The downgrade reflects governance considerations as Advance Auto plans to issue $1.5 billion in new senior unsecured notes, which will result in higher leverage and weaker interest coverage for fiscal 2025 and 2026. Moody’s now expects debt/EBITDA to reach about 6.1x by the end of fiscal 2025, significantly higher than its previous expectation of 4.5x.
The company already shows weak credit metrics for the period ending April 19, 2025, with lease-adjusted debt/EBITDA of 8.6x and EBITA/interest of -1.4x, primarily due to restructuring costs incurred during Q4 2024 and Q1 2025.
Proceeds from the new notes will boost Advance Auto’s cash balances, potentially allowing it to reduce its reliance on supply chain finance. As of April 19, the company had $3.2 billion outstanding under its supply chain finance program.
The Ba3 rating is supported by the company’s good liquidity and financial policy that includes maintaining its reduced dividend and cessation of share repurchases. The company had $1.7 billion in cash at the end of Q1 2025, which Moody’s expects to increase to about $3 billion by fiscal year-end following the new notes issuance.
Moody’s anticipates credit metrics will improve in 2026 as restructuring costs diminish and GAAP earnings grow, with debt/EBITDA and EBITA/interest expected to improve to 4.7x and 1.8x respectively.
The negative outlook reflects uncertainty around Advance Auto’s ability to quickly turn around its GAAP operating earnings over the next 12-18 months, with sales to DIY consumers down in the low single digits range in Q1 2025.
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