What Is Impacting Rating Changes Rating Trends and

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

Retail Elaine Francolino, VP - Senior Credit Officer Marie Menendez, VP - Senior Credit Officer

Moody’s Retail Ratings Span the Rating Spectrum

Continuing Negative Credit Trend: Downgrades Exceed Upgrades For US Retailers

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 Downturn on 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

Per-capita Drug Spending Growth > 10% per year

Low-margin Rx Becoming Larger Part of Sales Mix

The Importance of Scale in Maintaining Operating Margins • Stronger negotiating position with HMOs, PBMs, & other 3 rd-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 Factors driving individual ratings: + Internally generated CF largely finances capital investment + Located in defendable markets - Lack scale to gain efficiencies - Decreasing front-end sales

Food, Beverage and Other Consumer Products Companies Peter H. Abdill, CFA VP - 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

Gaming and Lodging Peggy Holloway, VP - Senior Analyst Keith Foley, VP - Senior Analyst

Rating Action Summary Since 9/11/01 • Lodging & Resorts • 16 companies placed on review for possible downgrade • 2 companies confirmed, but rating outlook changed to negative • 3 companies downgraded • Gaming • 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

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