S&P Cuts Long-Term Ratings on Cintas Corp. (CTAS) to 'BBB+'; Outlook Stable

August 18, 2016 2:08 PM EDT

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S&P Global Ratings lowered its long-term ratings on Cintas Corp. (Nasdaq: CTAS), including its corporate credit and senior unsecured debt ratings, to 'BBB+' from 'A-'. We also affirmed our 'A-2' short-term commercial paper rating. The outlook is stable.

Our rating action assumes the company completes the proposed acquisition of G&K on generally the terms presented to us. We estimate reported debt outstanding pro forma for the proposed transaction totals about $3.65 billion.

"The lower long-term ratings reflect the substantial pro forma credit measure deterioration that will result from Cintas' proposed 100% debt-financed $2.3 billion acquisition of competitor G&K," said S&P Global Ratings credit analyst Gerald Phelan.

The ratings on Cintas incorporate the company's strong position in the uniform rental and facility services industry--which will strengthen as a result of the proposed G&K acquisition. S&P Global Ratings estimates Cintas' share of the outsourced uniform rental market including G&K will increase to at least 40%, compared to around 30% presently. The ratings also incorporate the company's diverse customer base, above-average profitability, and solid operating efficiency, which we believe reflects its economies of scale and solid management team. We also factor into our rating the industry's correlation to U.S. employment levels--which would translate into meaningful sales and profit deterioration in the event of a protracted recession--and moderate sensitivity to input costs, including energy, labor, fabric, and textiles.

"We expect Cintas' management team, which has a high degree of acquisition experience, to successfully integrate G&K, to eliminate duplicate expenses quickly, and to consolidate select routes over a multiyear period, which is primarily a function of facility lease expirations," said Mr. Phelan. "In addition, we expect the company to roll out SAP over the next few years with limited disruption, since management has experience implementing SAP at other units, and because we believe there will be little customization of the system, which in our opinion reduces operational risk."

The stable outlook incorporates a slow-growth nonrecessionary economic environment in the U.S. and the company's commitment to reducing leverage. S&P Global Ratings expects Cintas to use the majority of its discretionary cash flow over the next several years to reduce debt, which, in combination with cost synergies from the G&K acquisition, will result in adjusted debt to EBITDA improving to around 2x within two years of close. We also assume Cintas will successfully implement SAP throughout the combined company over the next several years, and will slow or halt deployment if it encounters unexpected operational problems.

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