S&P Upgrades US Foods (USFD) to 'B+; Outlook is Positive

S&P Global Ratings raised all of its ratings on US Foods Inc. (NYSE: USFD), including our corporate credit rating to 'B+' from 'B'. The outlook is positive.

At the same time, we raised our issue-level rating on the company's $1.3 billion asset-backed revolving credit facility (ABL) to 'BB' from 'BB-', with a recovery rating of '1', indicating our view that lenders could expect 90%-100% recovery in the event of a payment default. Also, we raised our issue-level rating on the company's $2.1 billion senior secured term loan B to 'B+' from 'B', with a recovery rating of '3', indicating our view that lenders could expect meaningful (50% to 70%, at the lower half of the range) recovery in the event of a payment default. In addition, we raised our issue-level rating on the company's $1.35 billion senior unsecured notes to 'B-' from 'CCC+', with a recovery rating of '6', indicating our view that lenders could expect 0-10% recovery in the event of a payment default.

Our rating actions assume the company follows through with its stated intention to use the majority of the IPO net proceeds to redeem a large portion of the senior unsecured notes. Pro forma for the proposed transactions, we estimate debt is about $4 billion.

"The upgrades reflect the successful completion by USF's parent of its IPO and conditional notice to use the majority of net proceeds to redeem approximately $1.1 billion principal amount of its 8.5% senior unsecured notes due 2019," said S&P Global Ratings analyst Brennan Clark.

Our ratings on USF reflect the company's solid number two position in the highly competitive and fragmented foodservice distribution industry; its low, albeit stable, profit margins; and its substantial scale. In our view, USF's broad geographic reach and size provide the company with purchasing economies relative to many smaller competitors. We also recognize that USF's good route density--albeit below industry leader Sysco Corp.--should contribute to its satisfactory operating efficiency.

The positive outlook reflects our belief that US Foods has the ability to continue to pay down debt and grow EBITDA as it restores its market position following the termination of the disruptive Sysco transaction last year. It also reflects our assumption that the influence of the financial sponsors, which still own over 75% of the company's stock, will continue to decline. We could raise the ratings if we expect debt to EBITDA to fall and hover below 5x on a sustained basis, which we estimate could occur if US Foods repays $575 million of debt or EBITDA increases by 15% compared to our pro forma estimates as of April 2, 2016. An upgrade is also contingent on increased confidence of reduced risk of any re-leveraging event, such as a material acquisition or shareholder remuneration.

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