New York, May 29, 2020 -- Moody's Investors Service (Moody's) assigned a B2 rating to The Chefs' Warehouse, Inc.'s (Chefs) proposed amended first lien term loan due 2025. The company's existing ratings are unchanged, including its B2 corporate family rating (CFR), B2-PD probability of default rating, B2 term loan rating and SGL-3 speculative grade liquidity rating. The ratings outlook remains negative.
The amendment will extend the maturity of the $238 million (outstanding amount) term loan to 2025 from 2022, increase pricing by 200bp and add a minimum liquidity covenant. In conjunction with the transaction, the company will pay down 15% of the outstanding amount (payable to consenting lenders only).
Moody's views the transaction as credit positive because it extends the company's debt maturity profile and modestly lowers debt levels. Moody's expects the company to have adequate liquidity over the next 12-18 months, with a $227 million pro-forma cash balance and $80 million borrowings under the $150 million asset-based revolving credit facility.
Moody's took the following rating actions for The Chefs' Warehouse, Inc.:
Proposed Senior Secured Bank Credit Facility, assigned B2 (LGD4)
RATINGS RATIONALE
The Chefs' Warehouse, Inc.'s B2 corporate family rating incorporates Moody's expectations that the company will have adequate liquidity over the next 12-18 months. The rating also reflects Chefs' position as a premier distributor of specialty food products in the United States and Canada. The company benefits from serving customers a product portfolio with a deep selection of specialty and center-of-the-plate food products that differentiates its offering from the larger, traditional broadline foodservice distributors. Chefs has been able to command solid operating margins relative to its peers. Nonetheless, its scale remains modest as revenue and EBITDA are much smaller than that of its public company foodservice industry peers. A key credit constraint is the expectation that Chefs' customer base will shrink as a result of the temporary restaurant closures and lower volumes once restaurants reopen. Chefs' niche focus is on independent restaurant operators that have riskier credit profiles and liquidity, providing them with less ability to withstand their closure in response to COVID-19. Acquisitions have historically been integral to the company's growth. The rating also incorporates governance considerations, specifically the company's balanced financial policies.
The negative outlook reflects Moody's view that Chefs' operating performance and credit metrics will remain under considerable pressure given its exposure to independent restaurants, which are expected to be hurt by the disruption of COVID-19 and the ensuing weakness in consumer demand.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could result in an upgrade include an ability to increase its scale while maintaining debt to EBITDA around 4.5 times and EBITA to interest above 2.25 times on a sustained basis. An upgrade would also require Chefs' maintaining at least good liquidity.
Factors that could result in a downgrade include leverage on a debt to EBITDA basis of around 5.5 times or EBITA coverage of interest below 1.75 times on a sustained basis. A deterioration in liquidity for any reason could also result in a downgrade. The ratings could also be negatively impacted in the event Chefs' financial strategy towards acquisitions or shareholder returns became more aggressive.
The Chefs' Warehouse, Inc. distributes specialty food products to menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools, bakeries, patisseries, chocolatiers, cruise lines, casinos, and specialty food stores in the United States and Canada. The company generated net sales of $1.6 billion for the twelve months ended March 27, 2020.
The principal methodology used in this rating was Distribution & Supply Chain Services Industry published in June 2018 and available at
