Fitch Rates Limited's $500MM Sr Unsecured Notes 'BB'

Business Wire, June 16, 2009

CHICAGO -- Fitch Ratings has assigned a 'BB' rating to Limited Brands, Inc.'s (Limited) $500 million senior unsecured guaranteed notes due 2019. The notes will be guaranteed on an unsecured basis by each of the subsidiaries that guarantee the senior credit facility and term loan. The proceeds of the offering will be used to repay existing debt and for general corporate purposes. The company's decision to pay down either the secured $750 million term loan due 2012 or unsecured debt with the use of proceeds could have an impact on future ratings.

Fitch has also affirmed Limited's existing ratings as follows:

-- Long-term Issuer Default Rating (IDR) at 'BB ';

-- Bank credit facility at 'BB ';

-- Term loan at 'BB ';

-- Senior unsecured notes at 'BB';

-- Short-term IDR at 'B';

-- Commercial Paper at 'B'.

The Rating Outlook is Negative.

The ratings reflect Limited's strong market positions in intimate apparel and personal care and beauty products, solid cash flow generation and strong liquidity. This is balanced by Limited's weaker operating performance and credit metrics given the current challenging operating environment, increasingly competitive landscape and track record of shareholder-friendly activities. The Negative Outlook reflects the potential for prolonged weakness in same store sales that would negatively impact operating margins and weaken credit metrics as well as management's discipline with regards to share repurchases.

Limited is a leading intimate apparel retailer under the brands Victoria's Secret and La Senza with 1,358 stores as of May 2, 2009. In addition, Victoria's Secret Beauty and Bath & Body Works (BBW), with 1,638 stores, represent the fifth largest beauty and personal care company in North America in terms of sales. The company's focus on better working capital management has helped generate positive free cash flow of $360 million in the last twelve months (LTM) ending May 2, 2009. The company's strong liquidity position is supported by $936 million of cash as of May 2, 2009 and full availability under its $1 billion credit facility, which will provide financial flexibility to the company.

Nonetheless, Limited's credit metrics have weakened given the current challenging operating environment, which has pressured revenues and operating EBIT. For the LTM period, Limited's leverage ratio (adjusted debt/EBITDAR) increased to 4.5 times (x) from 4.1x in 2007 while EBITDAR coverage of interest and rent expense decreased to 2.2x from 2.5x over the same period. Fitch expects 2009 leverage and coverage ratios to weaken further as operating profit is expected to decline given lower revenues and pressure on operating margins. In addition, the competitive landscape is intense as Limited competes with many different types of retailers including individual and chain specialty stores, department stores, discount retailers as well as e-commerce and catalogue businesses.

Limited has a track record of shareholder-friendly activities as excess cash flow has been directed to share repurchases historically. Currently, share repurchases have been halted as a result of the limitation on restricted payments in the credit facility covenants. However, Fitch expects this trend will resume once profitability improves.

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