S&P: HD Supply Inc.'s $550 Million Term Loan B-2 Rated 'BB' (Recovery Rating: '2')
All of our other ratings on Atlanta-based HD Supply are unaffected. We expect that the industrial distribution company will use the proceeds from the term loan, along with cash on hand and about $600 million of borrowings under its $1.5 billion asset-backed revolving credit facility, to repay its existing $1.275 billion 7.5% senior notes due 2020.
The positive outlook on HD Supply reflects the potential that we may upgrade the company if it continues to improve its credit measures. Specifically, we may upgrade HD Supply if we expect that its funds from operations (FFO)-to-total debt ratio will remain above 20% while its debt-to-EBITDA metric stays consistently below 4x. We estimate that the company's FFO-to-total debt ratio was more than 13% and its debt-to-EBITDA metric was nearly 4.5x for the trailing 12 months ended July 31, 2016.
For a more detailed rationale, please see our research update on HD Supply published March 25, 2016, on RatingsDirect.
Key analytical factorsWe are updating our recovery analysis on HD Supply's debt obligations to reflect the proposed $550 million term loan B-2.Our recovery ratings on all of the company's debt instruments are unchanged. Simulated default assumptionsWe valued the company on a going concern basis using a 7x multiple of our projected emergence EBITDA of $425 million. We estimate that, for the company to default, its EBITDA would need to decline materially, representing a significant deterioration from the company's current state of business. Simplified waterfallNet enterprise value (after administrative costs): $2.826 billionValuation split (obligors/nonobligors): 95%/5%Asset-based lending (ABL) claims (60% utilized ABL facility): $807 million--Recovery expectations: 90%-100%Collateral value available to first-lien secured creditors: $1.889 billionSecured first-lien debt claims: $2.685 billion--Recovery expectations 70%-90% (lower half of the range)Total value available to unsecured claims: $6 millionSenior unsecured debt claims: $1.029 billionOther pari passu unsecured claims: $796 million--Recovery expectations: 0%-10%Note: All debt amounts include six months of accrued and unpaid prepetition interest.