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Moody's affirms Advance Auto Parts on transition plan progress

Moody's on May 24 affirmed Advance Auto Parts Inc.'s Baa2 senior unsecured rating, with a stable outlook, citing the significant progress in its transition plan.

The rating agency said the Roanoke, Va.-based aftermarket auto parts retailer is now reaping the full benefits of its larger store base and its WorldPac Inc. business following the integration of General Parts International Inc., or GPI, which the group acquired for $2 billion in 2014.

"Financial policy in the form of increased share buybacks has taken a more aggressive tone as GPI debt has reduced, as well as the influence of a known shareholder activist as board chairman," Moody's Vice President Charlie O'Shea said in a statement.

Moody's said Advance Auto Parts' quantitative profile remains robust despite a recent increase in share repurchases.

Meanwhile, the agency said the presence of a known shareholder activist as the company's board chairman increases the potential for a shift in financial policy. Jeffrey Smith, CEO and chief investment officer of activist hedge fund Starboard Value LP, has been the chairman of Advance Auto Parts since May 2016.

However, the agency said it expects Advance Auto Parts' credit metrics to remain steady and its financial policy to remain relatively benign for the next 12 to 18 months as the company continues with its transition.

The agency said an upgrade is likely if the ongoing transition plan drives improvements in operating performance and if the retailer's financial policy remains conservative.

Moody's also warned that it could downgrade Advance Auto Parts' ratings if there are surprises with respect to operating performance as the transition progresses, or if a financial policy shift results in debt/EBITDA rising above 3x or EBITA/interest falling below 5x.