Staples credit rating deemed junk status in wake of buyout

August 9, 2017

The nation’s top two credit rating agencies downgraded Staples Inc. well into junk status yesterday due to the financials of Sycamore Partners’ pending $6.9 billion leveraged buyout of the nation’s No. 1 office supplies chain.

S&P Global Ratings downgraded the Framingham company’s corporate credit rating four steps to B+ from BBB-, citing Staples’ substantial debt burden and “meaningfully weaker credit metrics” from the deal. S&P removed Staples from a negative CreditWatch in place since June 29, a day after the Sycamore deal was announced, saying the outlook now is “stable.”

“We believe Staples faces intense competition in the office supply distribution business, limited entry barriers and low customer switching costs,” S&P said. “Still, because of the company’s market position ... we expect profits and cash flows should remain consistent over the next one to two years, even if top-line revenue remains soft, driven by cost-cutting initiatives and price reinvestment.”

Sycamore’s Staples deal is set for a Staples shareholder vote Sept. 6. Staples’ retail store operations would be separated from the company, which would go private and continue under Sycamore ownership as a business-to-business office supplies distributor with about $10 billion in estimated annual revenue.

Staples plans to issue approximately $4.25 billion of new debt, and Sycamore would contribute $1.6 billion of common equity to fund the B2B deal.

Staples declined comment on the downgrades yesterday. Ratings below investment grade are often referred to as junk status because of obligations judged to be speculative and subject to substantial credit risk.

Moody’s Investors Service also took ratings actions on Staples, including a four-notch downgrade of its senior unsecured loan rating to B3 from Baa2, and a B1 corporate rating.

“The acquisition of Staples by affiliates of private equity firm Sycamore Partners … results in significantly weaker credit metrics, as well as the inherent enhanced credit risk of private equity ownership,” Moody’s vice president Charlie O’Shea said.

O’Shea continued, “That said, the restructuring of the business into three segments, with the commercial/delivery business the surviving rated entity, allows management to focus on a relatively narrow competitive universe where it is the clear market leader, with a historically ‘sticky,’ less fickle customer base that is focused more on service than price, which will prove advantageous going forward on multiple fronts.”