Seven&i Holdings Co. Ltd.

We placed the long- and short-term issuer and issue credit ratings on Seven&i Holdings Co. Ltd., its subsidiary Seven-Eleven Japan Co. Ltd., and 7-Eleven Inc. on CreditWatch with negative implications on Aug. 3, 2020. We intend to resolve the CreditWatch placements after the acquisition is officially completed and all related financing is in place. In resolving the placements, we will examine the final terms and conditions of the acquisition, projected earnings from the stores it will obtain, and the progress in post-merger integration, including franchising. We are likely to lower the long-term ratings by one or two notches if the acquisition proceeds as planned and the company finances the deal mostly with debt. Seven&i is the

...Seven & i's financial standing will worsen substantially, in our view, because it will finance the acquisition of U.S.-based convenience store and gas station chain Speedway LLC entirely with debt. This is despite efforts to ease its financial burden and incremental contributions from Speedway to its EBITDA. We estimate Seven & i's ratio of debt to EBITDA, a key financial metric, will considerably exceed the 2.0x tolerance level for the ratings, worsening to above 3.5x after the acquisition from 1.5x as of the end of fiscal 2019 (Feb. 29, 2020). We expect the ratio to improve to about 3.0x in the following two to three years, provided two scenarios occur. First, the COVID-19 pandemic recedes in Japan and the U.S. and business conditions stabilize. Second, the acquisition results in solid benefits from successful post-merger integration. Its subsidiary Seven-Eleven Japan Co. Ltd. will maintain its leading position in the Japanese convenience store market, driven by its merchandising policies...

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