NEW YORK — Moody’s Investors Service on Friday assigned a speculative grade, or junk, liquidity rating of “SGL-2″ to Gap Inc. reflecting its expectation that existing cash balances of nearly $2.5 billion as of the third quarter ended Nov. 2 will be sufficient over the next 12 to 18 months to fund capital expenditures, seasonal working capital needs and debt service.
The rating also reflects the fact that the company’s committed bank agreement is heavily used as backup for trade letters of credit, and its assets are encumbered.
Moody’s on Friday initiated the new rating to further explain Gap’s debt position.
Moody’s said recent progress in the company’s efforts to turn around its 26-month run of negative comparable-store sales and its weak profitability have somewhat obscured normal seasonal patterns, and that cash at the end of the third quarter is actually higher than it was at the end of the first quarter of 2002, despite the fact that the inventory for the key holiday season is being built.
As a result, Moody’s anticipates that cash will continue to grow in fiscal 2003, even after funding projected capital expenditures of $350 million to $400 million and the scheduled repayment of $500 million of maturing debt in May.
Moody’s also expects that share repurchases will not be resumed in the near term; that the fourth-quarter impact of the West Coast dock strike will be between $17.4 million and $60.9 million, and that the temporary problems with the company’s in-transit inventory reporting system will have been permanently resolved.
The senior implied rating on Gap’s debt is “Ba2″ with a negative outlook.