New York, November 30, 2012 -- Moody's Investors Service today assigned a (P)Caa2 rating to US Foods, Inc.'s ("US Foods") proposed upsized senior unsecured notes and affirmed all other ratings, including the B3 corporate family rating, and continued the stable outlook. Upon closing, the $350 million in proposed proceeds from the notes will be utilized to repay a $702.5 million term loan set to mature in July 2014.
New ratings assigned:
$750 million ($350 million in new money) senior unsecured notes due 2019 at (P)Caa2 (LGD5, 83%)
Ratings affirmed include:
Corporate family rating at B3
Probability of default at B3
$521 million senior subordinated notes due 2017 at Caa2 (LGD6, 94%)
$400 million senior unsecured notes due 2019 at Caa2 (LGD5, 83%)
Ratings affirmed and to be upgraded following closing of the proposed $350 million in senior unsecured notes and full repayment of the $702.5 million term loan:
$1.584 billion ($350 million in new money) senior secured term loan due 2017 at B3 (LGD3, 47%)
$425 million senior secured term loan due 2017 at B3 (LGD3, 47%)
Ratings affirmed and to be withdrawn following closing of the proposed term loan and $350 million senior unsecured notes:
$702.5 million senior secured term loan due 2014 at B3 (LGD3, 47%), which will be repaid proceeds from the proposed term loan and notes
"The proposed facility aids liquidity by providing funds to fully repay the $702.5 million term loan maturing July 2014, and effectively extending $350 million to 2019 from 2014, however it should be noted that interest costs rise such that coverage is negatively impacted," stated Moody's Senior Analyst Charlie O'Shea. "Moody's notes the potential upgrade to B2 of the senior secured term loan is largely reliant upon the proposed $350 million increase in notes."
US Foods' B3 Corporate Family and Probability of Default ratings continue to reflect the company's highly leveraged capital structure and weak credit metrics, positive factors such as its execution ability and formidable market position as a solid and defensible number two behind market-leader Sysco in an increasingly competitive environment led by specialized niche operators such as Restaurant Depot. The ratings also reflect our assumption that credit metrics will continue to show only modest incremental improvement over the next 12 months given an aggressive financial policy and the fact that much of the company's cash flows go to service debt and fund capital expenditures. US Foods' liquidity profile, which we believe is good, and is a key ratings consideration for the company, continues to improve and become more manageable from a debt maturity perspective with the proposed effective extension of the maturity of the $700 million term loan that is due to mature in July 2014. In the event the proposed facility is not executed, liquidity would be impaired.
The stable rating outlook is based on our expectation that US Foods' credit metrics will continue to incrementally improve to a level that is more representative of the current B3 rating and that the company will execute the refinance of the $700 million term loan maturing in July 2014. The stable outlook also reflects our view that the company's qualitative factors -- a solid franchise and market position, growing private label percentage, and stable, though low, margins -- help to balance out its weak quantitative profile.
At present, there is minimal upward pressure on the company's ratings given its highly leveraged profile and the aggressive financial policy mandated by its sponsors. Absent a significant improvement in operations, we expect only modest improvements in credit metrics. Quantitatively, an upgrade could occur if debt/EBITDA sustains at 6 times, EBITA/interest remains above 1.75 times, and financial policy remains tempered. In the event the company's overall liquidity profile deteriorates, which includes the failure to execute the pending refinance of the $700 million term loan, the ratings could be downgraded. Also, if credit metrics do not improve such that debt/EBITDA begins making tangible progress towards 7 times, or if EBITA/interest falls below 1.25 time, ratings could be downgraded.
The principal methodology used in rating US Foods was the Global Retail Industry Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
US Foods, Inc. is a leading North American food service marketing and distribution company, with annual revenues of around $20 billion. The company operates as a national, broad-line distributor, providing a complete range of products -- from fresh farm produce, frozen food, and specialty meat products to paper products, restaurant equipment, and machinery.
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Charles O'Shea Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Kendra M. Smith MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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