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Trustee under the Indenture The Bank of New York 101 Barclay St., Floor 21 West New York, NY 10286 Attention: Corporate Trust Administration

MATTHEW W. ABBOTT EDWARD T. ACKERMAN JACOB A. ADLERSTEIN A L L A N J . ARFFA ROBERT A, ATKINS DAVID J . B A L L SCOTT A. BARSHAY PAUL M. BASTA J O H N F. BAUGHMAN J, STEVEN BAUGHMAN LYNN B. BAYARD CRAIG A. BENSON MITCHELL L. BERG MARK S. BERGMAN DAVID M. BERN1CK JOSEPH J . B IAL BRUCE BIRENBOIM H. CHRISTOPHER BOEHNING ANGELO BONV1NO DAVID W. BROWN SUSANNA M. BUERGEL PATRICK S, C A M P B E L L * JESSICA S, CAREY JEANETTE K. CHAN GEOFFREY R, CHEP1GA E L L E N N. CH1NG W I L L I A M A, CLAREMAN LEWIS R. CLAYTON YAHONNES CLEARY JAY COHEN KELLEY A. CORNISH CHRISTOPHER J . CUMM1NGS THOMAS V. DE LA BASTIDE III ARIEL J . DECKELBAUM ALICE BEL1SLE EATON ANDREW J . EHRLICH GREGORY A. EZRiNG LESLIE GORDON FAGEN ROSS A. F1ELDSTON BRAD J . F INKELSTE iN BRIAN R F INNEGAN ROBERTO FINZI PETER E. FISCH ROBERT C. FLEDER MARTIN FLUMENBAUM A N D R E W J . FOLEY A N D R E W J , FORMAN* HARRIS B. FREIDUS MANUEL S. FREY ANDREW L. GAINES KENNETH A- GALLO MICHAEL E, GERTZMAN ADAM M- GIVERTZ SALVATORE GOGLIORMELLA NEIL GOLDMAN ROBERTO J . GONZALEZ* CATHERINE L, GOODALL ERIC GOODiSON CHARLES H, GOOGE, JR A N D R E W G. GORDON BRIAN S. GRIEVE UDI GROFMAN NICHOLAS GROOMBRiDGE BRUCE A. G U T E N P L A N A L A N S. HALPERIN JUSTIN G. H A M i L L CLAUDIA HAMMERMAN BRIAN S. H E R M A N N M1CHELE H tRSHMAN MICHAEL 5. HONG DAVID S, HUNTINGTON AMRAN HUSSEIN LORETTAA. JPPOLITO JAREN JANGHORBANI BRIAN M. JANSON JEH C. JOHNSON

"NOT ADMITTED TO THE Nt;w YORK BAH

MEREDITH J . KANE JONATHAN S, KANTER BRAD S. KARP PATRICK N. KARSNITZ JOHN C. KENNEDY BRIAN KIM KYLE J. KIMPLER DAVID M. K L E I N A L A N W, KORNSERG DANIEL J . KRAMER DAVID K. L A K H D H I R STEPHEN P. L A M B * JOHN E. LANGE GREGORY F. LAUFER BRIAN C. LAVIN X1AOYU GREG LIU JEFFREY D. M A R E L L MARCO V. MASOTT! EDWIN S, MAYNARD DAVID W. MAYO ELIZABETH R. MCCOLM ALVARO MEMBRILLERA MARK F MENDELSOHN CLAUDJNE MERED1TH-GOUJON WILL IAM B MICHAEL JUDIE NG SHORTELL* CATHERINE NYARADY JANE B. O 'BRIEN ALEX YOUNG K. OH BRAD R. OKUN KELLEY D. PARKER LINDSAY B. PARKS VALERIE E. RADWANER CARL L. REiSNER LORIN L, REISNER WALTER G. RICCIARDI WALTER RIEMAN RICHARD A. ROSEN ANDREW N. ROSENBERG JACQUELINE P. RUBIN CHARLES F. '•RICK" R U L E * RAPHAEL M. RUSSO ELIZABETH M. SACKSTEDER JEFFREY D. SAFERSTEIN JEFFREY B. SAMUELS DALE M. SARRO TERRY E. SCHIMEK KENNETH M. SCHNEIDER ROBERT B. SCHUMER JOHN M. SCOTT DAVID R S1CULAR MOSES SILVERMAN AUDRA J . SOLOWAY SCOTT M, SONTAG TARUN M. STEWART ERIC A L A N STONE A iDAN SYNNOTT RICHARD C. TARLOWE MONICA K. THURMOND DANIEL J . TOAL LIZA M. VELAZQUEZ RAMY J. W A H B E H LAWRENCE G WEE THEODORE V. W E L L S , JR. STEVEN J . W I L L I A M S LAWRENCE t, WITDORCHIC MARK B. W L A Z L O JUL IA MASON WOOD JENNIFER H. W U BETTY Y A P ' JORDAN E. YARETT KAYE N. YOSHINO TONG YU TRACEYA. ZACCONE TAURIE M. ZEITZER T. ROBERT ZOCHOWSKI . JR

With a copy to:

Counsel for Safeway as Issuer of the Debentures Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Attention: Stuart D. Freedman, Esq.

Re: Safeway Inc. 7.25% Debentures due 2031

Ladies and Gentlemen:

We represent holders of more than 45% of the aggregate principal amount (the "Holders") of the 7.25% Debentures due 2031 (the "Debentures") of Safeway Inc. ("Safeway"). For the reasons stated below, the Holders believe a default has occurred and is continuing under the indenture governing the Debentures (the "Indenture"). The holders therefore respectfully request that the Bank of New York, as trustee (the "Trustee") under the Indenture, promptly issue a Notice of Default under Section 6.1(d)

PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

The Bank of New York Safeway Inc. Schulte Roth & Zabel LLP 2

of the Indenture. Capitalized terms used but not otherwise defined in this letter shall have the meanings ascribed to them in the Indenture.

In summary, Safeway's default arises from its breach of the negative covenant contained in Section 4.7 of the Indenture. That covenant, among other provisions, prohibits Safeway from incurring Liens on its assets other than Permitted Liens unless the Debentures are equally and ratably secured by the Liens. In 2015, however, Safeway breached this covenant by incurring Liens—specifically, certain Liens securing an asset-based lending facility and a term loan agreement—that were not Permitted Liens and that did not secure the Debentures (the "2015 Liens").

Safeway's position appears to be that the 2015 Liens were Permitted Liens because those Liens supposedly secured Safeway's Indebtedness under the Bank Credit Agreement or under an initial or subsequent renewal, extension, refinancing, replacement, or refunding of the Bank Credit Agreement. The Indenture defined the Bank Credit Agreement to mean a specified agreement with certain banks, as that agreement "may be amended . . . supplemented or otherwise modified from time to time . . . ." Consequently, unless the 2015 Liens can be traced, in the manner set forth in the Indenture, to the Bank Credit Agreement, Safeway has incurred Liens prohibited by the Indenture.

No reasonable person could believe that the 2015 Liens have the required relationship to the Bank Credit Agreement. That is so because, among other reasons, the 2015 Liens arise from agreements that served completely different purposes from the Bank Credit Agreement and that, unlike the Bank Credit Agreement, did not benefit Safeway. The Bank Credit Agreement was a revolving credit facility that functioned as a backup to Safeway's commercial paper program and had, when it was terminated in connection with Safeway's acquisition by Albertsons in 2015, a maximum availability of $1.5 billion (most of which was undrawn). The Bank Credit Agreement provided funding to Safeway for ordinary-course working capital, capital expenditures and refinancings of Safeway's commercial paper that were necessary for the day-to-day operations of the business of Safeway and its subsidiaries.

In contrast, Safeway incurred the 2015 Liens in connection with nearly $7.3 billion in borrowings that were used to finance another entity's purchase of Safeway and another entity's payment of its existing debt. These new facilities represented not just a marked increase in size but also a dramatic, categorical shift in function and structure.

Safeway's new owner forced Safeway to accept the 2015 Liens for the exclusive benefit of that new owner and its other subsidiaries, which are not subsidiaries of Safeway but are sister companies. In other words, Safeway's new owner harmed Safeway and its creditors, including holders of the Debentures, by burdening Safeway with Liens as part of the new owner's scheme to extract value from Safeway without any corresponding benefit to Safeway. When holders of the Debentures agreed that Safeway



could incur certain Liens related to the Bank Credit Agreement, those holders were certainly not agreeing that a company outside of Safeway and its subsidiaries could use this modest and sensible provision as a way of imposing potential devastation on Safeway and its debtholders through unlimited liens supporting the provision of credit for completely different purposes to other entities. Neither the words of the Indenture, nor any reasonable understanding of its purposes, authorized the impermissibly exploitive conduct of Safeway's new owner. And it now appears that Safeway's new owner is on the verge of committing new breaches of the Indenture by burdening Safeway with Liens securing massive new debt—again for which Safeway and its debtholders derive no benefit—through the use of this same subterfuge.

Thus, for the reasons set forth in more detail below, the Holders believe that a default (the "Existing Default") has occurred and is continuing under the Indenture due to a failure to comply with Section 4.7 of the Indenture as a result of:

• the incurrence on January 30, 2015 of Indebtedness for which Safeway acts as co-obligor that is secured by a Lien on the assets of Safeway under (i) that certain asset-based revolving credit agreement dated as of March 21, 2013, as amended January 30, 2015, among Albertson's Holdings LLC ("Albertsons Holdings"), Albertson's LLC ("Albertsons LLC"), Safeway and certain of their affiliates, as borrowers, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America N.A., as administrative and collateral agent (the "Albertsons ABL Agreement") and (ii) that certain second amended and restated term loan agreement, dated as of August 25, 2014 and effective as of January 30, 2015 among Albertsons LLC, Safeway, New Albertson's, Inc. and the other co-borrowers, as borrowers, Albertsons Holdings and the other guarantors from time to time party thereto, as guarantors, the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch, as administrative and collateral agent (the "Albertsons Term Loan Agreement," and, together with the Albertsons ABL Agreement, the "Albertsons Credit Agreements");

• each incurrence subsequent to January 30, 2015, of Indebtedness for which Safeway acts as co-obligor that is secured by the 2015 Liens; and

• the failure by Safeway to provide that the Debentures are equally and ratably secured with the Indebtedness under the Albertsons Credit Agreements.

As a result, the Holders respectfully request that the Trustee provide to Safeway a Notice of Default with respect to the Existing Default pursuant to Section 6.1(d) of the Indenture.



In addition, the Holders respectfully request that the Trustee provide the other holders of Debentures with a copy of this letter either pursuant to Section 312(b) of the Trust Indenture Act of 1939 and Section 10.3 of the Indenture or through other appropriate means reasonably calculated to provide this letter to such other holders.

A. Section 4.7 of the Indenture limits Safeway's ability to incur Liens on its assets securing its Indebtedness.

Section 4.7 of the Indenture reads as follows:

"The Company shall not, nor shall it permit any of its Subsidiaries to, create, incur, or permit to exist, any Lien on any of their respective properties or assets, whether now owned or hereafter acquired, or upon any income or profits therefrom, in order to secure any Indebtedness of the Company, without effectively providing that the Debentures shall be equally and ratably secured until such time as such Indebtedness is no longer secured by such Lien, except.. .(iv) Permitted Liens..."

The Holders believe that Safeway has breached Section 4.7 of the Indenture because Safeway incurred the 2015 Liens on the assets of Safeway that secure the outstanding Indebtedness (for which Safeway acts as co-obligor) under the Albertsons Credit Agreements (collectively, the "Albertsons Credit Agreement Indebtedness"), and the incurrence by Safeway of such Liens is not permitted without equally and ratably securing the Debentures. Safeway became a co-obligor under the Albertsons Credit Agreements in connection with Albertsons' acquisition of Safeway (the "Acquisition"), which was completed on January 30, 2015.

It is unclear to the Holders why Safeway did not equally and ratably secure the Debentures when Safeway became a co-obligor under the Albertsons Credit Agreement Indebtedness and incurred the related 2015 Liens, but the Holders surmise that Safeway is taking the position that the 2015 Liens are "Permitted Liens" pursuant to clause (i) of the definition thereof, which reads:

"(i) Liens securing Indebtedness of the Company under the Bank Credit Agreement and any initial or subsequent renewal, extension, refinancing, replacement or refunding thereof..."'

"Bank Credit Agreement" is defined in the Indenture as follows:

1 While it may be the case that Liens on accounts receivable and merchandise inventory were permitted under Permitted Liens clause (ii), the other 2015 Liens were not.



"Bank Credit Agreement" means the Credit Agreement dated as of April 8, 1997 among the Company, The Vons Companies, Inc. and Canada Safeway Limited, as borrowers, Bankers Trust Company, as administrative agent, The Chase Manhattan Bank, as syndication agent, The Bank of Nova Scotia and Bank of America National Trust and Savings Association, as documentation agents, and the other lenders which are parties thereto, as such agreement may be amended (including any amendment, restatement and successors thereof), supplemented or otherwise modified from time to time, including any increase in the principal amount of the obligations thereunder.

In order to take the position Safeway seems to be taking, the Albertsons Credit Agreements would need to be a "renewal, extension, refinancing, replacement or refunding" or an amendment, restatement, successor, supplement or other modification of the Bank Credit Agreement that existed as of the date the Debentures were issued (the "Safeway 1997 Bank Credit Agreement").

However, because the Bank Credit Agreement that was in effect immediately prior to the Acquisition was "terminated," according to Safeway's public filings,2 the Albertsons Credit Agreements could not have been a "renewal," "extension," "amendment" (including by way of amendment, restatement and succession), "supplement" or "other modification" of the Safeway 1997 Bank Credit Agreement. Since the foregoing concepts are inapplicable to a terminated agreement, Safeway would have to take the position that the Albertsons Credit Agreements were a "refinancing," "replacement" or "refunding" of the Safeway 1997 Bank Credit Agreement. Safeway's position is unwarranted by the language of the Indenture and contrary to the facts and circumstances surrounding the Acquisition and Safeway's accession to the Albertsons Credit Agreements as a co-obligor with Albertsons LLC.

B. The Albertsons Credit Agreements are markedly different in function, structure and size from the Safeway 1997 Bank Credit Agreement, so the Albertsons Credit Agreements are not a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Safeway 1997 Bank Credit Agreement.

Based on the meaning of "Bank Credit Agreement" contained in the Indenture at the time the Debentures were issued, the Albertsons Credit Agreements cannot reasonably be deemed to be a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Bank Credit Agreement in effect at the time the Debentures were issued.

Safeway's Annual Report on Form 10-K for the year ended January 3, 2015, page 34.



When the Debentures were issued in early 2001, the Bank Credit Agreement then in effect was the Safeway 1997 Bank Credit Agreement. The Safeway 1997 Bank Credit Agreement was a $3.0 billion unsecured revolving credit facility for which Safeway and certain of its subsidiaries were the co-borrowers. The prospectus (including the documents incorporated by reference) under which the Debentures were issued3 stated explicitly the role of the Safeway 1997 Bank Credit Agreement in Safeway's capital structure and business operations:

"Based upon the current level of operations, Safeway believes that operating cash flow and other sources of liquidity, including borrowings under Safeway's commercial paper program and the bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels. The bank credit agreement is used primarily as a backup facility to the commercial paper program."4

This disclosure is consistent with a similar disclosure made by Safeway in its 2000 Annual Report on Form 10-K, just prior to the issuance of the Debentures. According to that disclosure, the function of the Safeway 1997 Bank Credit Agreement was to refinance maturing commercial paper borrowings that were not refinanced through new commercial paper borrowings:

"Commercial paper is classified as long-term because the Company intends to and has the ability to refinance these borrowings on a long-term basis through either continued commercial paper borrowings or utilization of the bank credit agreement, which matures in 2002."5

As a result, an investor in the Debentures (whether such investor invested at the initial issuance of the Debentures or subsequently) would have concluded reasonably that the term, "Bank Credit Agreement," for purposes of the Indenture, referred to the Safeway 1997 Bank Credit Agreement, which was a revolving line of credit that served primarily as a source of supplemental liquidity for Safeway and its subsidiaries, backing up Safeway's commercial paper program. Furthermore, such an

Prospectus of Safeway with respect to the Debentures, dated August 10, 1999 and supplemented on January 29, 2001, filed with the SEC under Rule 424(b)(5).

Note C to the financial statements contained in Safeway's quarterly report on Form 10-Q for the quarter ended September 9, 2000 (emphasis added).

Note C to the financial statements contained in Safeway's annual report on Form 10-K for the year ended January 1, 2000.

PAUL, W E I S S , R I F K I N D , W H A R T O N & G A R R I S O N LLP


investor would reasonably have concluded that any "renewal, extension, refinancing, replacement or refunding" or any amendment, restatement, successor, supplement or other modification, of the Safeway 1997 Bank Credit Agreement would serve a similar function.

Indeed, up until the completion of the Acquisition in January 2015, each successor and replacement for the Safeway 1997 Bank Credit Agreement (which matured in 2002) continued to serve that function, and each succession and replacement was consistent with the reasonable expectations of investors in the Debentures. The Safeway 1997 Bank Credit Agreement was amended and restated in May 2001 (the "Safeway 2001 Bank Credit Agreement"), continuing as a $2.5 billion unsecured revolving facility maturing in 2006, and the disclosure in Safeway's annual reports on Form 10-K continued to be consistent with the disclosure with respect to the Safeway 1997 Bank Credit Agreement. The Safeway 2001 Bank Credit Agreement continued to be a source of operating liquidity as an adjunct to Safeway's commercial paper program:

"Based upon the current level of operations, Safeway believes that EBITDA and other sources of liquidity, including borrowings under the Company's commercial paper program and bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway's business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under the commercial paper program and bank credit agreement."6

The Safeway 2001 Bank Credit Agreement was replaced in June 2005 by a new $1.6 billion unsecured revolving facility maturing in 2010 (the "Safeway 2005 Bank Credit Agreement"). The Safeway 2005 Bank Credit Agreement was amended and extended twice so as to mature in 2012. The disclosure continued to be consistent with past practice. The Bank Credit Agreement, together with commercial paper borrowings, continued to be a source of operating liquidity for Safeway:

6 Safeway Inc. 2001 Annual Report (filed as Exhibit 13.1 to Safeway's annual report on Form 10-K for the year ended December 29, 2001), page 17.



"Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including borrowing capability under the Company's commercial paper program and bank credit agreement, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway's business will continue to generate cash flow at or above current levels or that the Company will be able to maintain its ability to borrow under the commercial paper program and bank credit agreement."7

The Safeway 2005 Credit Agreement was amended and restated once again in June 2011 as a $1.5 billion unsecured revolving credit facility due in 2015 (the "Safeway 2011 Bank Credit Agreement"). In addition, in December 2011, Safeway entered into a $700 million delayed-draw term credit agreement due 2015 (the "Safeway Term Credit Agreement"). Safeway's disclosure with respect to the Safeway 2011 Bank Credit Agreement remained consistent with past practice for instruments considered to be "Bank Credit Agreements" by Safeway:

"Based upon the current level of operations, Safeway believes that net cash flow from operating activities and other sources of liquidity, including potential borrowing under Safeway's commercial paper program, its credit agreement, its term loan agreement and debt offerings, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments, dividend payments, stock repurchases, if any, and scheduled principal payments for the foreseeable future. There can be no assurance, however, that Safeway's business will continue to generate cash flow at or above current levels or that the Company will maintain its ability to borrow under its commercial paper program and credit agreements."8

Quite tellingly, after Safeway entered into the Safeway Term Credit Agreement, it took great pains to distinguish it from the "Bank Credit Agreement" in its SEC disclosure documents. In Note D to the financial statements in Safeway's annual report on Form 10-K for the year ended December 31, 2011 and in each subsequent Form 10-K prior to the Acquisition, Safeway described the Safeway Term Credit Agreement under the heading "Term Credit Agreement" (referring to it as the "term credit agreement") and continued to describe the Safeway 2011 Bank Credit Agreement under the heading.

7 Safeway's annual report on Form 10-K for the year ended December 31, 2005, page 26 (emphasis added).

8 Safeway's annual report on Form 10-K for the year ended December 31,2011, page 53 (emphasis added).



"Bank Credit Agreement" (referring to it as the "bank credit agreement"), as it had throughout the 14 years since the issuance of the Debentures.

In a radical departure from this 14-year course of conduct, upon the closing of the Acquisition, Safeway became an obligor under nearly $7.3 billion of additional Indebtedness (including both term loans and revolving indebtedness) secured by Liens on Safeway's assets, under the Albertsons Credit Agreements. According to Safeway's disclosures, the Safeway 2011 Bank Credit Agreement was "terminated" in connection with the Acquisition.9 Safeway's disclosures with respect to the use of proceeds of the Albertsons Credit Agreement Indebtedness are starkly different from the disclosures with respect to the Safeway Bank Credit Agreements:

"In connection with the Merger, on January 30, 2015, Safeway became party to (i) an asset-based revolving credit agreement with borrowing capacity of up to $3 billion, $980 million of which was drawn on January 30, 2015 and (ii) a term loan agreement with a principal amount equal to $6.3 billion (which may, in certain circumstances, be increased). In addition, pursuant to the Merger, Safeway is an obligor and its domestic subsidiaries are guarantors of $609.7 million in principal amount of 7.75% senior secured notes (after repayment of some of those notes on February 9, 2015). The proceeds of this indebtedness, together with approximately $650 million of cash on hand, were used to pay a portion of the Merger consideration and related fees and expenses of the Merger and to provide working capital."10

A portion of the Indebtedness under which Safeway became a co-obligor under the Albertsons Credit Agreements was used to provide funding to Albertsons Holdings to buy all of the outstanding shares of stock of Safeway in the Acquisition. In addition, Safeway became a co-obligor with respect to all of the Indebtedness of Albertsons LLC under the Albertsons Credit Agreements that existed prior to the Acquisition. This combination of new term and revolving debt to finance a purchase of all of the outstanding equity of Safeway in the Acquisition plus the assumption of the term and revolving debt of an unrelated third party is a far cry from the borrowings to fund ordinary course liquidity needs under the unsecured revolving Safeway 1997 Bank Credit Agreement (or its successors and replacements) that Safeway maintained throughout the 14-year course of conduct after issuance of the Debentures. As a result, holders of the Debentures (or, for that matter, the draftspersons of the Indenture in 2001) could not have foreseen that instruments so far afield from the Safeway 1997 Bank Credit Agreement like the Albertsons Credit Agreements would ever be considered a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor.

9 Safeway's Annual Report on Form 10-K for the year ended January 3, 2015, page 34. 10 Safeway's annual report on Form 10-K for the year ended January 3, 2015, page 26

(emphasis added).



supplement or other modification of the Safeway 1997 Bank Credit Agreement for purposes the Indenture, particularly since the Safeway 2011 Bank Credit Agreement was terminated in connection with the Acquisition. The Albertsons Credit Agreements simply cannot be included within the scope of the terminology used in the Indenture at the time it was drafted.

Furthermore, the change in the principal amount of outstanding borrowings from the Safeway 1997 Bank Credit Agreement to the Albertsons Credit Agreements is multiple orders of magnitude, making it impossible to claim the Albertsons Credit Agreements constituted a refinancing or refunding of the Safeway 1997 Bank Credit Agreement. Outstanding borrowings under the Safeway 1997 Bank Credit Agreement and the other instruments that were called "Bank Credit Agreements" by Safeway throughout the 14 years after issuance of the Debentures and prior to the Acquisition were typically in the $50-$200 million range, out of a commitment size ranging from $1.5 to $3.0 billion, in keeping with the character of the Safeway 1997 Bank Credit Agreement as an ordinary-course liquidity facility. However, after the Acquisition, Safeway was an obligor on, and its assets secured, more than $7.3 billion of debt, including $6.3 billion under the Albertsons Term Loan Agreement and $980 million under the Albertsons ABL Agreement. This seismic shift in debt, from $50-200 million to over $7.3 billion, or a factor of 50 to 100, shows that the Albertsons Credit Agreements fundamentally had nothing to do with Safeway, its assets or its benefit. The radical shifts of the debt—from being unsecured to being secured, from having a sole obligor to having multiple obligors whose interests were primarily elsewhere, from constituting borrowings of less than 1% of Safeway's assets to being more than half, from being a mostly undrawn liquidity facility to being primarily a term loan debt financing used to acquire, not an asset for Safeway, but Safeway itself,—render the credit agreements before and after the Acquisition completely unrelated to one another.

Even if Safeway could argue that the Albertsons ABL Agreement is similar to the Safeway Bank Credit Agreements (since it is a revolving credit agreement whose borrowings could be used to fund ordinary-course liquidity needs), by Safeway's own admission in its SEC filings, the Indebtedness under the Albertsons ABL Agreement that was incurred on the date of the Acquisition was clearly not incurred to satisfy ordinary-course liquidity needs, so it could not be deemed a refinancing, replacement, refunding or successor of the Safeway Bank Credit Agreements. Furthermore, because Safeway made a clear delineation between a "term credit agreement" and a "bank credit agreement" in its SEC filings after entering into the Safeway Term Credit Agreement in December 2011, investors in Safeway's securities could not have expected that the Albertsons Term Loan Agreement could be considered a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Safeway 1997 Bank Credit Agreement that was in effect at the time the Debentures were issued due to its fundamentally different structure as a term credit agreement.



The same analysis would apply to any additional Indebtedness for which Safeway is an obligor (and pledgor of its assets) that are incurred to finance the acquisition of Rite Aid Corp. by Albertsons Holdings (the "Rite Aid Acquisition").

C. The benefits of the Indebtedness incurred under the Albertsons Credit Agreements do not inure to Safeway or its subsidiaries, so the Albertsons Credit Agreements are not a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Safeway 1997 Bank Credit Agreement.

The Safeway 1997 Bank Credit Agreement in effect at the time the Indenture was executed was entered into by Safeway for the benefit of Safeway and all of its stakeholders to provide liquidity for Safeway as an operating business. In contrast, the Albertsons Credit Agreements have Safeway as only one of the borrowers but include other entities, including Albertsons LLC, that are not subsidiaries of Safeway. As a result, massive borrowings were made under the Albertsons Credit Agreements in connection with the Acquisition, and the proceeds have not been available for use by Safeway or its subsidiaries to satisfy any of their liquidity needs (as was the case for borrowings under the Safeway Bank Credit Agreements during the 14 years prior to the Acquisition). Even worse, the only beneficiaries of such borrowings in connection with the Acquisition were Albertsons Holdings, Albertsons LLC and the equityholders of Safeway. Essentially, Albertsons Holdings, Albertsons LLC and the equityholders of Safeway used Safeway as a gigantic "piggy bank" to benefit themselves to the direct detriment of the other stakeholders in Safeway, including holders of the Debentures and Safeway's other unsecured debt securities. Such a state of affairs could not have been what was contemplated by the investors in the Debentures or the draftspersons of the Indenture in 2001.

As a result, it is not reasonable for Safeway to take the position that the Albertsons Credit Agreements are a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Safeway 1997 Bank Credit Agreement that was in effect at the time the Debentures were issued.

Upon completion of the Rite Aid Acquisition, even more non-subsidiary co-borrowers are expected to be added to the Albertsons Credit Agreements, and additional Indebtedness will be assumed by Safeway and secured by its assets whose benefit to Safeway and its stakeholders will again be dubious at best. The same analysis would apply to any such additional Indebtedness.



D. Because the Albertsons Credit Agreements are not a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Bank Credit Agreement in effect at the time the Debentures were issued, the incurrence by Safeway of the 2015 Liens on its assets violate Section 4.7 of the Indenture.

As demonstrated above, the Albertsons Credit Agreements are not a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Bank Credit Agreement in effect at the time the Debentures were issued. As a result, the 2015 Liens are not Permitted Liens under the Indenture. By failing to equally and ratably secure the Debentures with the Albertsons Credit Agreements, Safeway is in manifest breach of its obligations under Section 4.7 of the Indenture.

Any additional Indebtedness for which Safeway becomes an obligor (and pledges its assets) in connection with the Rite Aid Acquisition (including under the Albertsons Credit Agreements) would similarly cause a breach under Section 4.7 of the Indenture, absent the Debentures being equally and ratably secured.

For the foregoing reasons, the Holders believe that Safeway has breached Section 4.7 of the Indenture and request that the Trustee promptly send Safeway a Notice of Default under Section 6.1(d) of the Indenture. The Holders expect that Safeway and its affiliates will not take any actions (including the incurrence of additional secured indebtedness) that may be to the detriment of the holders of Debentures. Accordingly, the Holders reserve all rights and remedies (including the pursuit of litigation and other relief) with respect to the Indenture and related matters. Furthermore, the Holders reserve the right to seek all remedies available under the Indenture and under New York law, including expectation damages equal to the redemption price set forth in the Indenture. The Holders further expect that Safeway and its affiliates and advisors will preserve all documents pertinent to the matters discussed above, including any communications among such parties and their advisors, underwriters of any debt securities with respect to which Safeway is an obligor or guarantor and agents with respect to any credit facilities to which Safeway is a party.

The Holders' counsel (and, when appropriate, the Holders themselves) are willing to meet immediately with Safeway and its advisors to discuss and reach a fair resolution of the concerns addressed in this letter (and, to this end, may retain financial

PAUL, WEISS, RIFKIND, WHARTON

The Bank of New York Safeway Inc. Schulte Roth & Zabel LLP

GARRISON LLP

13

advisors to assist them in the near future). The Holders sincerely hope that Safeway accepts this invitation.

cc: Brian S. Hermann Walter Rieman Julia Tarver Wood

Lawrence G. Wee

Yolanda Ash The Bank of New York Mellon Corporate Trust 2 North LaSalle Street, Suite 700 Chicago, IE 60602

Documents

PAUL, WEISS, RIFKIND, WHARTON 6? GARRISON LLP · paul, weiss, rifkind, wharton 6? garrison llp 1 285 avenue of the americas new york. ... brian s. hermann m1chele htrshman michael