DBRS Morningstar Comments on George Weston Limited’s Intention to Sell Weston Foods

DBRS Limited (DBRS Morningstar) notes George Weston Limited’s (George Weston or the Company, rated BBB with a Stable trend by DBRS Morningstar) announcement that, following a strategic review, the Company intends to divest its bakery business, Weston Foods. Subsequent to any future divestiture, the Company plans to focus on its Retail and Real Estate businesses, consisting of Loblaw Companies Limited (Loblaw, rated BBB (high) with a Stable trend by DBRS Morningstar) and Choice Properties Real Estate Investment Trust (Choice, rated BBB (high) with a Stable trend by DBRS Morningstar). The Company intends to commence a sale process shortly and has signalled that the proceeds from the sale are likely to be returned to shareholders through share repurchases over time.

DBRS Morningstar’s ratings on George Weston are currently based on (1) the Company’s position as the holding company of Choice (approximately 61.8% ownership), (2) the Company's position as the holding company of Loblaw (approximately 52.6% ownership), and (3) the Company’s ownership of Weston Foods combined with (4) the strength of George Weston's credit metrics and liquidity profile. Based on each subsidiary’s contribution to George Weston’s available cash flow and adjusted for George Weston’s ownership interest in each respective entity with a one-notch penalty for the structural subordination on the leveraged cash flows received from Loblaw and Choice, DBRS Morningstar calculated a weighted-average subsidiary rating (WASR) of BBB. DBRS Morningstar combined this WASR with the assessment of George Weston’s financial and liquidity profile, which DBRS Morningstar views as strong for the rating.

While no definitive sale agreement has been reached and details around the ultimate allocation of proceeds of such a divestiture are not yet known, DBRS Morningstar believes that the Company’s ratings are likely to remain the same. DBRS Morningstar would expect to continue to base its ratings on George Weston on (1) the Company’s position as the holding company of Choice and (2) the Company’s position as the holding company of Loblaw combined with (3) the quality of the Company’s liquidity profile. DBRS Morningstar expects the WASR to remain at BBB, based on the respective contributions of Loblaw and Choice to George Weston’s cash flows, through dividends and distributions, and adjusted for George Weston’s ownership interest in each entity with a one-notch penalty for structural subordination.

DBRS Morningstar notes that, as long as the ratings on Loblaw and Choice are BBB (high), the ratings on George Weston, as a pure holding company, would effectively be capped at the BBB level because of the structural subordination. Conversely, although it is unlikely, George Weston's ratings could be lowered if Loblaw and Choice were downgraded or should George Weston’s nonconsolidated debt levels exceed 20% of nonconsolidated capital, which may result in the one-notch differential between the subsidiaries, Loblaw and Choice, and George Weston being inadequate.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Consumer Products Industry (July 30, 2020; https://www.dbrsmorningstar.com/research/364690 ), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165 ), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020; https://www.dbrsmorningstar.com/research/369167 ), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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