TEXT-S&P: US Foods Inc's rating unchanged after notes add-on
Jan 11 - Standard & Poor's Ratings Services said today that the 'CCC+' rating on Rosemont, Ill.-based US Foods Inc.'s (USF's) upsized $1.175 billion senior unsecured notes due 2019, which includes the proposed $200 million add-on, is unchanged. The recovery rating on the notes is '6', indicating our expectation of negligible recovery (0% to 10%) for note holders in the event of a payment default or bankruptcy. We expect that the proceeds from the add-on offering will be used to repay over $190 million of USF's 11.25% senior subordinated notes, the related make-whole premium, and fees. The ratings are subject to change and assume the transaction is closed on substantially the terms presented to us. All of our other existing ratings on the company, including the 'B' corporate credit rating, remain unchanged. The outlook is stable. Pro forma for the proposed transaction, total debt outstanding is about $4.9 billion. USF's ratings reflect Standard & Poor's analysis that the company's financial risk profile will remain "highly leveraged" for the foreseeable future. This is based on our opinion that the company has a very aggressive financial policy and significant debt burden. It is our opinion that the company's gross 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 thanks to fixed cost reductions and some debt repayment. Over the next year, we expect adjusted leverage to approach 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. Nevertheless, the potential for meaningfully higher food costs 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. For the complete corporate credit rationale, please see the research update on US Foods Inc. published Nov. 30, 2012, on RatingsDirect. RELATED CRITERIA AND RESEARCH -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Criteria For Rating The Global Branded Nondurable -- Consumer Products Industry, April 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 RATING LIST Rating unchanged US Foods Inc. Corporate credit rating B/Stable/-- Senior secured B- Recovery rating 5 Senior unsecured $1.175 mil. 8.5% notes CCC+ Recovery rating 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.