US Foods Inc. Downgraded To 'BB', Ratings Remain On CreditWatch Negative Due To Effects From COVID-19

  • The COVID-19 pandemic is leading to a growing number of event cancellations and closures of restaurants, schools, and other institutions. An emphasis on social distancing to avoid spreading the virus is also significantly reducing restaurant traffic.
  • We believe foodservice distributors will suffer significant near-term revenue and profit losses because of their reliance on these sectors.
  • We are lowering our issuer credit rating on US Foods Inc. (USF) to 'BB' from 'BB+', our issue-level rating on its senior secured debt to 'BB' from 'BB+', and our issue-level rating on its senior unsecured debt to 'BB-' from 'BB'.
  • All of our ratings on the company remain on CreditWatch, where we placed them with negative implications on March 6, 2020.
  • The CreditWatch reflects the potential for a lower rating over the next few months after we assess the near- and long-term effects of COVID-19 on USF's credit metrics and liquidity position. However, it is possible that we will leave our rating on the company on CreditWatch for a longer-than-expected period due to the uncertainty and volatility created by current conditions.
CHICAGO (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above. Sales and profit will materially decline over at least the near term. It is likely that there will be--at least over the near term--even more event cancellations and closures of restaurants, schools, and other institutions. The elevated emphasis on social distancing may also lead to reduced restaurant traffic even if the closures are short lived. We estimate that USF's adjusted EBITDA could decline by more than 50% over the next few quarters depending on the severity of the drop in its sales. At this time, we still expect the company to complete its $970 million acquisition of Smart Foodservice Warehouse Stores (announced in early March 2020) in the next couple of months. Pro forma for the transaction, we previously expected the company's leverage to modestly exceed 5x (versus the mid-4x area prior to the transaction). However, we now anticipate that USF's leverage could, at least temporarily, approach or exceed the double digits in the next few quarters due to the potential rapid deterioration in its EBITDA stemming from the pandemic. The company announced that it has drawn $1 billion under its asset-based lending (ABL) revolver and accounts-receivable financing facility (ABS) to strengthen its liquidity position. We believe it still has material availability under those facilities, though its availability could shrink significantly as its receivables decline in line with the reduction in its sales.
The CreditWatch reflects the potential for a downgrade over the next few months. However, given the uncertainty around the duration of the outbreak, including the potential that it may reoccur after the summer, our ratings could remain on CreditWatch for a longer-than-normal period. We expect to resolve the CreditWatch placement after we assess the severity and duration of the impact of COVID-19 on USF's liquidity position and credit metrics. We will also incorporate the potential financial impact of the Smart Foodservice acquisition, though our ratings on the company could remain on CreditWatch after the transaction closes.
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