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(Bloomberg) -- Staples long-term rating of Baa2 will likely be downgraded to junk assuming proposed $6.9b acquisition by Sycamore closes as generally stated, Moody’s analyst Charles O’Shea says in a report. S&P also puts BBB- corporate rating on watch for downgrade as it expects a “very meaningful” increase in debt.

• Other ratings on review for downgrade by Moody’s include senior unsecured commercial paper, senior unsecured bonds
• Moody’s assumes “significant levels” of new debt to finance the buyout
• Bloomberg Intelligence analyst Noel Hebert says by phone that deal can be done with “a pretty low leverage number” and Staples should still be able to delever by 0.25-0.5 turns a year since it generates so much free cash flow
  • With $1.5b equity contribution, Staples would be levered ~4.25-4.5x, which means on a secured basis they’d probably be rated BB or BB- for unsecured: Hebert
  • Sycamore deal may allow Staples to explore M&A opportunities in expanding its B2B operations, but it depends if they want to run business for growth or cash; Hebert cites Uline Inc., distributor of packaged materials, as a possible name of interest
• Transaction would likely trigger change-of-control covenants in Staples debt, according to independent credit research firm Covenant Review
  • This would require co. to buy back 2023 bonds at 101, assuming it’s cut to junk in connection with the change of control
  • 2018s likely to be redeemed due to upcoming maturity, while 2023s likely subject to 101 put: Cov. Review
  • Possible Sycamore will try to circumvent the below- investment-grade rating provision and avoid the buyback, by providing collateral and guarantees to head off downgrades; on balance, though, change-of-control protection seems effective

To contact the reporter on this story: Molly Smith in New York at msmith604@bloomberg.net To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Rick Green, Kenneth Pringle