The Chefs# Warehouse Inc. Upgraded To #B+# On Strengthening Credit Outlook Stable

Stocks and Financial Services Press Releases Tuesday June 19, 2018 18:07
CHICAGO--19 Jun--S&P Global Ratings
CHICAGO (S&P Global Ratings) June 18, 2018--S&P Global Ratings today raised its corporate credit rating on Ridgefield, Conn.-based The Chefs' Warehouse Inc. to 'B+' from 'B'. The outlook is stable.

At the same time, we raised our issue-level rating on the company's first-lien debt (which consists of a $305 million senior secured term loan and $50 million senior secured delayed draw term loan) to 'B+' from 'B'. The recovery rating on the first-lien debt remains '3', indicating our expectation for meaningful recovery (50%-70%, rounded estimate: 60%) in the event of a default. Total debt outstanding as of March 31, 2018 was about $317 million.

The upgrade reflects Chefs' Warehouse's steady profit growth, strengthening credit metrics, and moderating financial policies. While we believe tuck-in acquisitions will remain an important part of the company's growth strategy, we do not expect it would transact large debt-financed acquisitions that result in leverage sustained above 5x. The company's recent modestly sized equity offering, which we believe was completed to help finance future acquisition opportunities, supports our view. We recognize the entrance of activist investor Legion Partners, which appointed two new board directors early this year, but we believe the investor is operationally focused and will not negatively influence the company's financial policies. We now forecast leverage to be in the mid-4x area by fiscal year-end 2018.

The stable outlook reflects our expectation that Chefs' Warehouse will maintain consistent financial policies, such that leverage is sustained below 5x. This includes our view that the company will remain focused on growth both organically and through tuck-in acquisitions, and that shareholder returns will not be a priority in the near term. We also believe the company will maintain healthy and consistent profit margins by successfully managing moderate food and fuel cost inflation.

We could lower the ratings if we forecast debt to EBITDA will be sustained above 5x, which could occur if the company adopts more aggressive financial policies (a large debt-financed acquisition or shareholder payment, for example), or if it struggles to manage food input cost volatility or integration of future acquisitions. We estimate leverage could increase to 5x if debt increases by about $50 million or EBITDA declines by about 15%.

Although unlikely over the next 12 months, we could raise our ratings on Chefs' Warehouse if we reassess our view of its business favorably. We would base this on meaningfully increased scale and geographic diversification, improved route density, and a demonstrated track record of managing input cost fluctuations—particularly proteins. This would also be predicated on the company maintaining leverage well below 5x.

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