What Is Impacting Rating Changes?

Rating Trends and Outlook

Retail, Consumer Goods & Hospitality

Moody’s 2002 Corporate Finance Credit Outlook Investor Briefing

New York, January 15, 2002

Elaine Francolino, VP - Senior Credit Officer

Marie Menendez, VP - Senior Credit Officer

Retail

Moody’s Retail RatingsSpan the Rating Spectrum

02468

1012141618202224262830

Continuing Negative Credit Trend: Downgrades Exceed Upgrades For US Retailers

-7

-5

-3

-1

1

Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01

Why Are Retail Ratings So Volatile?

• Record prosperity masked fundamental problems

• Growth strategies increased risk profile

• Slower economy will hurt certain retailers disproportionately

• Competition is not static

Impact of Economic Downturnon Retail Credit Quality

• Turnarounds will be more difficult to achieve

• Consumers will be difficult to read• Political concerns could influence

consumer behavior over the intermediate term

• The gap between the strong and the weak will widen

Rating Considerations

• Market segment risks

• Market position

• Execution Capability

• Strategic Vision

• Diversification

• Financial risk and flexibility

Who Are the Challenged Retailers?

• Apparel retailers (including department stores)

• Lifestyle-oriented specialty retailers

• Retailers of discretionary goods

• Retailers with flawed strategies or poor execution

Retailers Who Can Weather the Storm

• Food should be relatively stable

• Discounters

• Retailers with scale and superior business models

• Retailers with good expense and inventory controls

Adequate Liquidity is More Important Than Ever

• Liquidity arrangements are critical, especially at peak

• Availability of public markets is never a certainty

• Re-financing in the bank market is increasingly difficult, even for highly rated companies

Key Ratios

• Fixed Charge Coverage

• EBITDA Coverage of Interest, before and after capital expenditures

• Adjusted Debt/EBITDAR

• Retained Cash Flow/Adjusted Debt

• Productivity and Market Share

Drug Store Retailers

Richard Baldwin, AVP - Analyst

Universe of Rated Drug Retailers

Company Rating

# of

Stores

Lease Adj.

Leverage

Fixed

Charge Cov.

Walgreen Aa3 3520 2.6x 7.8x

CVS A2 4135 3.1x 5.9x

Duane Reade Ba3 193 4.6x 1.8x

Rite-Aid B3 3594 7.6x 0.4x

Community Dist. Caa1 53 8.4x 1.0x

Phar-Mor Caa2 139 11.9x -0.1x

Per-capita Drug Spending Growth > 10% per year

$0

$250

$500

$750

$1,000

$1,250

1996 1998 2000 2002 2004 2006 2008 2010

Low-margin Rx Becoming Larger Part of Sales Mix

50%

55%

60%

65%

1998 1999 2000 LTM 09/01

The Importance of Scale in Maintaining Operating Margins

• Stronger negotiating position with HMOs, PBMs, & other 3rd-party payers

• Able to amortize investment in Rx labor savings over larger revenue base

• Efficiencies in marketing & purchasing

• Potentially more appealing career option for pharmacists

Rating Outlook is Stable Overall

+ Internally generated CF largely finances capital investment

+ Located in defendable markets

- Lack scale to gain efficiencies

- Decreasing front-end sales

Factors driving individual ratings:

Food, Beverage and Other Consumer Products

Companies

Peter H. Abdill, CFAVP - Senior Credit Officer

Industry Characteristics

• Consistent, repeat purchases

• Scale generates efficiencies

• Margin growth mostly from cost cutting

• Product and market maturity

• Importance of product differentiation and brand value

Risks and Strategic Responses

• Commoditization -- Innovate, flight to premium, build brand value

• Retailer clout -- Improve systems and service, build scale and brand value

• Mature markets -- Innovate and expand geographically

• High raw materials costs -- Cut operating costs, achieve scale

Rating Outlook

• Overall industry outlook: Stable • Positive: Those with strong brands,

leading positions, improving financial measures

• Negative: Those that have financial and integration risk due to M&A activity

• Negative: If execution faltered, costs grew disproportionately or brand slipped

Key Rating Considerations

• Balancing investment with realistic growth potential

• Improving supply chain management• Finding new ways to reduce costs without

sacrificing quality or brand investment• Event risk (litigation, regulation etc.)• Financial management

Peggy Holloway, VP - Senior Analyst

Keith Foley, VP - Senior Analyst

Gaming and Lodging

Rating Action Summary Since 9/11/01

• Lodging & Resorts

• Gaming

• 16 companies placed on review for possible downgrade• 2 companies confirmed, but rating outlook changed to negative• 3 companies downgraded

• 8 companies placed on review for possible downgrade• 2 companies confirmed, but rating outlook changed to negative

• Reviews to be completed in the near term

Year-to-Year Percent Change in REVPAR

-70.0%

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

Upper Scale

Upscale Chains

Midscale w/ F&B Chains

Midscale w/o F&B Chains

Economy Chains

Key Rating Considerations in Lodging Sector

• Some improvement in trends but pricing and yields still soft

• High degree of dependence on air travel and economy

• Minimal supply growth and leaner cost structures a plus

• Lower-end hotel product in second tier markets less volatile than high-end

• Business model

Key Rating Considerations in Gaming Sector

• Absence of new attractions in Las Vegas

• Atlantic City will eventually compete with NY State

• New wave of gambling initiatives across the U.S. could impact riverboat markets

• Timing and magnitude of recovery difficult to predict

Credit Metrics Were Already Weak

• An over reliance on EBITDA growth

• Economic upheaval under estimated

• Capital spending increasing faster

• Lower returns on capital investment

• Increased share repurchase activity

• More aggressive financial policies

What is the Result?

• More pressure on ratings and outlooks

• Qualitative considerations alone cannot sustain ratings

• Reduced earnings visibility