(The following statement was released by the rating agency)

Overview

-- US Foods Inc. is planning to refinance its $700 million senior secured

term loan due 2014 with a $350 million add-on secured term loan and a $350

million add-on senior unsecured note.

-- We are assigning our 'B-' issue-level rating to the foodservice

distributor's proposed upsized $1.587 billion term loan and leaving the 'CCC+'

issue-level rating on the proposed upsized $750 million senior notes

unchanged.

-- We are also affirming our 'B' corporate credit rating on the company.

-- The stable outlook reflects our view that the company should be able

to maintain credit measures at or slightly better than current levels, despite

prospects for elevated food costs, and the improved pro forma liquidity

profile.

Rating Action

On Nov. 30, 2012, Standard & Poor's Ratings Services affirmed its 'B'

corporate credit rating on Rosemont, Ill.-based US Foods Inc. (USF). The

outlook is stable.

In addition, we assigned our 'B-' issue-level rating to the company's upsized

$1.587 billion term loan, which includes the proposed $350 million add-on, and

affirmed the 'B-' issue level rating on USF's $425 million senior secured term

loan. The recovery ratings on the term loans are '5', which indicates our

expectation of modest (10% to 30%) recovery for creditors in the event of a

payment default or bankruptcy.

We also left our 'CCC+' issue rating to the upsized $750 million senior

unsecured notes unchanged, the amount of which now includes the proposed $350

million add-on. The recovery rating on the notes is '6', indicating our

expectation of minimal recovery (0% to 10%) for note holders in the event of a

payment default or bankruptcy.

The ratings are subject to change and assume the transaction is closed on

substantially the terms presented to us. Pro forma for the proposed

transaction, total debt outstanding is about $4.9 billion.

Rationale

The ratings on USF reflect Standard & Poor's Ratings Services' analysis that

the company's financial risk profile will remain 'highly leveraged' for the

foreseeable future. This is based on our opinion the company has an aggressive

financial policy and a significant debt burden. It is our opinion that the

company's gross profit margin will remain under pressure because of continued

weak demand and higher expenses, specifically elevated food costs. However, we

expect credit measures to show slight improvement through 2014 because of

selling, general, and administrative (SG&A) cost reductions and some debt

repayment. Over the next year, we expect adjusted leverage to remain above 7x

and the ratio of funds from operations (FFO) to total debt to remain weak at

roughly 8.5%.

Our 'fair' business risk assessment reflects USF's participation in an

intensely competitive, low-margin industry. The company benefits from its

satisfactory market position, relatively stable historic industry demand, and

broad geographic diversification within the U.S. We believe the company, which

was acquired in 2007 by its private equity sponsors in a leveraged buyout, is

the second-largest food service distributor in the U.S. (The company does not

disclose its financial statements publicly.) Nevertheless, the potential for

meaningfully higher food cost prices next year stemming from the 2012 drought

is a key risk factor. If food prices increase significantly, USF's

profitability could fall. This could occur if volume drops because of fewer

people purchasing food away from home, or if food service distributors are

unable to pass through most food cost inflation to customers.

USF faces substantial competition from thousands of competitors, including

market leader Sysco Corp. (A+/Negative/A-1), which has about a 19% U.S. market

share; unrated no. 3 competitor Performance Food Group Inc.; several large

regional players; and numerous local distributors. We believe USF has about

10% U.S. market share.

In our opinion, the intense competition, limited use of exclusive-distributor

status throughout the industry, and relatively low customer switching costs

will likely constrain profit growth. In addition, profitability could suffer

if large group purchasing organizations (GPOs) continue to increase their

roles in the food distribution chain.

Standard & Poor's economists estimate GDP growth of just 2.1% this year and

2.3% in 2013, consumer spending growth of 1.9% this year and 2.4% in 2013,

crude oil per barrel (WTI) finishing 2012 near $94 and finishing 2013 near

$90, and the unemployment rate remaining between 7.6% and 8.1% through late

2013. With these economic forecast considerations in mind, and expectations

for higher food costs, our base-case forecast for 2013 reflects the following:

-- Mid- to high-single-digit revenue growth, primarily reflecting mid- to

high-single-digit food cost inflation, flat organic volume growth, and

low-single-digit volume growth from acquisitions.

-- Low-single-digit EBITDA growth reflecting the impact of acquisitions

and modest restructuring benefits. We assume USF is unable to realize any

margin from food cost inflation.

-- Free cash flow of $50 million to $75 million, which reflects continued

high inventory levels and an increase in pension contributions.

Based on our assumptions, we forecast leverage in the low-7x area, FFO to

total debt of about 8%, and 2.4x EBITDA interest coverage. This compares to

our expectation for fiscal year 2012 ending with leverage of at least 7.5x,

FFO to total debt of 8.4%, and EBITDA interest coverage of 2.2x. These metrics

are in line with indicative ratios for our 'high leveraged' financial risk

descriptor, which include leverage above 5x and FFO to total debt below 12%.

We believe USF has reduced its cost structure over the past several years

through distribution center consolidation and select national restaurant chain

business exits. These initiatives have resulted in operating efficiency

improvements, including increased route density and fleet utilization.

We view USF's management and governance to be 'fair,' reflecting its control

by two financial sponsors.

Liquidity

In our opinion, USF has 'adequate' sources of liquidity to cover its operating

needs over the next year, even in the event of moderate, unforeseen EBITDA

declines. The proposed transaction should meaningfully improve USF's liquidity

profile over the next few years. Relevant aspects of the company's liquidity

profile, based on our criteria and assumptions, are as follows:

-- We expect USF's sources of liquidity over the next year to exceed uses

by at least 1.2x.

-- We estimate net sources of liquidity would be positive even if EBITDA

fell 20%.

-- We estimate pro forma debt maturities will total less than $25 million

annually over the next four years, excluding asset-based credit facilities

that mature in 2015 and 2016.

-- We forecast USF should generate $50 million to $75 million of free

cash flow in 2013.

We estimate pro form for the proposed transaction that USF has total cash and

borrowing availability of $596 million, including $146 million of cash, $350

million available under its $1.1 billion asset-based loan (ABL) revolving

credit facility, and full availability under its $100 million cash flow

revolver due 2013. We currently assume the $100 million cash flow revolver

will not be extended at maturity. The termination date on the $1.1 billion ABL

revolver is 2016. The ABL includes a 1x springing fixed-charge coverage ratio

if ABL availability is less than $100 million. USF currently has meaningful

ABL availability cushion above the level at which the fixed-charge covenant

would apply. USF also has a $800 million ABS that was recently extended to

2

COPYRIGHT

Copyright Thomson Reuters 2012. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.