Moody's Cuts Sysco Corp. (SYY) to 'A2' Following Review on U.S. Foods Deal

Moody's Investors Service today downgraded the long-term rating of Sysco Corp. (NYSE: SYY), to A2 from A1, and confirmed the Prime-1 short-term rating. The outlook is negative. This concludes the review for possible downgrade that commenced on December 9, 2013.

Ratings downgraded include:

Senior unsecured rating to A2 from A1

Senior unsecured shelf to (P) A2 from (P) A1

Subordinate shelf to (P) A3 from (P) A2

Rating confirmed:

Commercial paper at Prime-1

Rating assigned:

5 billion senior unsecured notes at A2

RATINGS RATIONALE

"Today's rating actions follow Sysco's announcement that it was launching a $5 billion senior unsecured note transaction, proceeds from which will replace virtually all of the existing funded debt in US Foods' capital structure," stated Moody's Vice President Charlie O'Shea. "This will result in an effectively debt-neutral acquisition, however given US Foods' high pre-existing leverage, Sysco's resultant pro forma leverage on a debt/EBITDA basis will initially rise to a little over 3 times, and interest coverage will reduce to less than 5 times, making the A1 rating unsustainable. We believe that over the next 24-36 months Sysco will generate sufficient levels of post-acquisition cash flow through a combination of factors including various revenue and expense synergies such that debt/EBITDA will reduce to close to 2.5 times, which would be in line with an A2 rating, and this assumption is a key rating driver. We do not, however, envision a scenario where metrics can return to their historic A1 levels for quite awhile. Proceeds from this issue will initially be held as cash by Sysco until completion of the FTC review, which we believe to be in its final stages. If for some reason the FTC review results in a termination of the proposed acquisition, Sysco must call the $5 billion at a 101 premium by October 2015."

The A2/Prime-1 ratings consider Sysco's excellent liquidity, its pro forma market position, which will include almost $70 billion in revenues, the efficiencies the combined companies will likely generate, both on the revenue and expense side that will ultimately strengthen the quantitative credit profile, as well as our expectation that free cash flow will be balanced in its deployment between shareholders and debtholders. The negative outlook reflects our belief that while we believe there is a reasonable likelihood that the company will largely realize both the level and cadence of the $600+ million in synergies, which would have the company on track to a solid A2/Prime-1 quantitative credit profile within 24-36 months, the early deterioration in credit metrics makes it necessary for the company to demonstrate that it is well on its way to improving its credit profile within the next 12-18 months, or downward rating pressure would begin to build. Given the increase in leverage and decrease in interest coverage, and the timeframe necessary for them to improve to a level commensurate with the A2 rating, upward rating movement over the next 3 years is unlikely. However, in the event debt/EBITDA reduced below 2.5 times, with interest coverage of greater than 7 times, upward rating pressure would emanate. Ratings could be downgraded if Sysco's post-acquisition credit profile were to weaken such that over the 12-18 month period following the close of the transaction achievement of debt/EBITDA of around 2.5 times within 24-36 months was proving unlikely, which would indicate that the synergies were not being achieved near projected levels, or that the company's financial policy was favoring shareholders disproportionately over debtholders from an application of free cash flow perspective.

The principal methodology used in this rating was the Global Distribution & Supply Chain Services published in November 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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