Staples’ adjusted EBITDA cratered in 1Q20 as demand for office supplies fell due to coronavirus (COVID-19) pandemic-related shutdowns, according to three sources familiar with the matter.

The company reported a 42.6% year-over-year decline in adjusted EBITDA to USD 135m for the 1Q20 period, the sources said. Meanwhile, quarterly revenue slid 8.6% YoY to USD 2.4bn, they added.

Gross margins fell 19.4% YoY on weakness of home deliveries, one of the sources said.

While the company sought to cut costs through employee furloughs and reducing executive compensation, its adjusted margin is projected to decline between 50bps – 100bps in 2020, according to a Standard & Poor’s note from 8 May.

Its adjusted leverage will likely exceed 8x this year and 7x in 2021, due to the economic recession and demand headwinds from the COVID-19 pandemic, according to S&P. The ratings agency downgraded Staples’ senior debt to B from B+ and the unsecured debt to CCC+ from B- on concerns of elevated leverage and cash flow pressures.

“Staples entered the current economic recession with a highly leveraged balance sheet and limited financial flexibility to withstand an extended economic downturn,” the S&P analysts wrote.

Still, Staples’ liquidity remained ample at USD 840m as of 2 May, through USD 577m of cash and USD 263m of ABL availability, two of the sources said.

The USD 2bn Libor+ 700bps term loan due 2026 softened to the 91.547/93.469 context from 92.213/94.1 yesterday, according to Markit. Meanwhile, the USD 300m L+ 450bps term loan due 2024 was relatively unchanged at 93.063/95.063.

The USD 2bn 7.5% senior secured notes due 2026 traded at 92.5 to yield 9.187% today, while the USD 1bn 10.75% senior unsecured notes due 2027 changed hands at 70 to yield 18.694% today, consistent with recent levels, MarketAxess shows.

Sycamore declined to comment. Staples did not respond to a request for comment.

2020 Debtwire