(The following statement was released by the rating agency)
-- 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
-- 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
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.
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
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.
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
-- 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
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