![The Moody's affirmation will come as a relief to Wesfarmers chief executive Rob Scott, who is keen to see Wesfarmers and ...](http://web.archive.org./web/20180320072730im_/http://www.afr.com/content/dam/images/h/0/x/k/w/0/image.related.afrArticleLead.620x350.h0xpol.png/1521519478444.jpg)
Ratings agency Moody's Investors Service has reaffirmed Wesfarmers' A3 short and long term credit ratings even though the $18 billion spin-off of Coles weakens the conglomerate's credit metrics.
"The demerger of Coles is negative from a credit perspective, due to the resulting reduction in scale, business diversification, and stability of earnings," said Moody's vice-president and senior credit officer Ian Chitterer.
"That said, Moody's has affirmed Wesfarmers' rating and left the outlook at stable as we expect that, in order to maintain its targeted A3 ratings, management will reduce leverage to compensate for these negative impacts," Mr Chitterer said.
Moody's cited the strength of Wesfarmers' remaining portfolio of assets including market leaders Bunnings Australia and New Zealand, Kmart, and Officeworks.
Moody's said all of these businesses had displayed strong growth over the past eight years and earned EBIT margins significantly above those at Coles.
The ratings agency also took into account the fact that Bunnings UK and Ireland was losing money and Target continued to underperform, saying these businesses would remain areas of focus in assessing Wesfarmers' credit profile.
Moody's added that the sale of Wesfarmers' mining assets would remove a significant source of earnings volatility from the group.
Strategic review
Wesfarmers agreed to sell its Curragh coal mine to US group Coronado Coal in December for $700 million and is undertaking a strategic review of its interest in the Bengalla mine. It expects to complete the sale of Curragh by the end of June once it has achieved conditions including Foreign Investment Review Board approval.
The Moody's affirmation will come as a relief to Wesfarmers chief executive Rob Scott, who is keen to see Wesfarmers and Coles retain strong investment grade credit ratings once the demerger is completed in 2019.
Moody's said its decision to leave Wesfarmers' outlook as stable was partly based on Mr Scott's desire to retain strong credit ratings and keep the dividend policy unchanged."Although the company has not provided details about its future capital structure, it has a demonstrated track record of consistently targeting A3 ratings, and remains publicly committed to those ratings," Mr Chitterer said.
Analysts say Coles' credit rating will depend mainly on how Wesfarmers' current net debt of $3.9 billion is split.
While Coles' capital structure has still to be finalised, analysts believe Coles will have net debt between $1.5 billion and $2.1 billion, annual lease costs of $1.25 billion and fixed charges cover between 2.6 and 2.8 times, which should enable it to achieve an investment grade credit rating of BBB or BBB+.
Moody's noted that Wesfarmers' had publicly stated that it assumed the ratings thresholds set by Moody's would be tightened to reflect the loss of Coles in terms of scale, business diversification and stability of earnings."There remains the risk that Wesfarmers could ultimately choose to target weaker credit metrics than the new parameters to be set by Moody's post the approval of the demerger, in which case Moody's could change the outlook to negative from stable or downgrade the rating," it said.
Wesfarmers shares were down 40¢ or 0.9 per cent at $43.16 at noon on Tuesday but remain above their level ($41.20) before the Coles demerger was announced on Friday.