Moody's downgrades Sysco, rates notes A2

Moody's Investors Service said it downgraded Sysco Corp.’s senior debt rating to A2 from A1 and assigned an A2 rating to its $5 billion senior notes. This concludes the review for possible downgrade that began Dec. 9, 2013, and the outlook is negative.

The notes will be used to replace virtually all of the existing funded debt in acquisition target US Foods, Inc.'s capital structure. “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,” Moody's vice president Charlie O'Shea said in an agency news release.

The agency said the A2 rating considers Sysco's excellent liquidity; its pro forma market position, which will include almost $70 billion of revenues; the efficiencies the combined companies will likely generate, both on the revenue and expense side that will ultimately strengthen the quantitative credit profile; and Moody’s expectation that free cash flow will be balanced in its deployment between shareholders and debtholders.

The negative outlook reflects the agency’s belief that while there is a reasonable likelihood that the company will largely realize both the level and cadence of the $600 million plus of synergies, which would have the company on track to a solid A2 quantitative credit profile within 24 to 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 to 18 months in order to avoid downward rating pressure.

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