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Rating Action:

MOODY'S ASSIGNS Ba3 RATING TO CARROLS CORP'S SECURED BANK FACILITY; AND ASSIGNS B2 RATING TO ITS SR SUB NOTES

06 Aug 1998
MOODY'S ASSIGNS Ba3 RATING TO CARROLS CORP'S SECURED BANK FACILITY; AND ASSIGNS B2 RATING TO ITS SR SUB NOTES New York, 08-06-98 -- Moody's Investors Service assigned a Ba3 rating to Carrols Corporation's $175 million secured bank facility (preliminary rating pending completion of documentation) and a B2 rating to its $150 million senior subordinated notes, and raised Carrols' senior implied rating to Ba3 from B1. The proceeds from the bank facility and senior subordinated notes will be used to refinance Carrols' existing debt which totals $250 million (approximately $100 million of this amount was incurred to finance the acquisition of Pollo Tropical in July of this year). Concurrent with the closing of this transaction Moody's expects to withdraw the B1 rating on Carrols' existing $107 million 11.5% senior unsecured notes due 2003, which the company will call for early redemption on August 15th. The rating outlook is stable.
The upgrade of the senior implied rating to Ba3 from B1, recognizes that management has demonstrated their ability to successfully integrate sizable acquisitions of established Burger King franchisees and maintain good returns on invested capital; and Carrols' strengthening position in the Burger King system which we believe is consolidating its franchisees.
The ratings reflect Carrols high financial leverage; management's acquisitive growth strategy; and the intense competition in the quick service segment of the restaurant industry. While Pollo Tropical has demonstrated good operating performance, and we believe that the company has paid a fair price for this acquisition, its future returns are, in our opinion, less predictable than the company's Burger King operations.
However, the ratings also consider Carrols' position as the largest franchisee in the Burger King system, management's good track record operating Burger King restaurants, and the expectation that the strong competitive position of the Burger King brand will provide a degree of stability to the company's operating performance relative to other quick service restaurant companies.
The stable rating outlook incorporates the expectation that management will likely continue to pursue additional acquisitions of Burger King franchises, but that management will maintain their disciplined approach to acquisitions, and that acquisitions would not be dilutive to debt protection measures following a moderate transition period. While significant debt reduction in the near term is not anticipated, we expect that total debt to EBITDA to decline to more moderate levels in the intermediate term.
The $175 million bank facility includes a $100 million five year revolving credit facility and a $75 million seven year term loan facility (nominal amortization in the first five years). The facility is secured by the substantially all of Carrols' real and personal property (note that Carrols' interest in the franchise agreements is not included as collateral, but the lenders would have rights to receive payments from the proceeds of the sale or transfer of the agreements). The Ba3 rating on the bank facility reflects our belief that the collateral would provide the lenders only modest protection in a distressed scenario given the intangible nature of the collateral and the lenders moderate control of the collateral.
The B2 rating on the senior subordinated notes recognizes that while the notes are guaranteed by all of the company's operating subsidiaries on a senior subordinated basis, the notes are contractually subordinated to a material amount of senior debt (primarily the $175 million credit facility, the $30 million additional debt basket and unlimited capital lease financing). The ratings also consider that the indenture will contain only modest protection from the incurrence of additional senior debt (EBITDA to interest test is 2 times relative to proforma coverage of 2.3 times, and would include proforma results of future acquisitions).
The company paid $97 million for Pollo Tropical Inc., which operates 36 quick service restaurants in south Florida, and franchises 19 units. The purchase price is sizable in relation to Pollo's trailing earnings, (7.5 times trailing EBITDA, 9.5 times trailing EBIT), but we believe that the intangible assets associated with the acquisition are supported by the company's returns. Average unit volumes are high relative to most quick service operators. Pollo Tropical's restaurant margins are relatively strong with EBITDA (less franchising income) is 17.6% of restaurant revenues, and its return on assets is good at 9.5% (based on trailing operating income with the intangible assets resulting from the acquisition included in the asset base).
Total debt will be 4.6 times proforma combined EBITDA, and would reduce to approximately 4.4 times EBITDA adjusted for the anticipated sale leaseback of several of the Pollo Tropical restaurants. The proforma EBITDA figures do not reflect the full integration of the 23 restaurant that were acquired in March of 1997 (cash purchase price $21 million) and the 63 restaurants that were acquired in August of 1997 (cash purchase price $51 million). Off balance sheet lease liabilities are significant, and we expect adjusted debt (which includes operating lease obligations) will be 5.4 times EBITDAR (assuming the company completes the intended $20 million sale leaseback). We expect that EBIT will cover interest expense 1.5 times, and EBITDA will cover interest expense 2.3 times.
We expect that operating income going forward will improve as the company realizes the full benefit of integrating these acquisitions into their operations. We also expect that operations will show improvement as the company cycles past last year's Hudson Beef incident which caused a significant decline in sales in last year's third quarter (contamination concerns caused the recall of all beef patties sold to Burger King). This event also negatively impacted the fourth quarter when stepped up promotional activity to reverse the sales trend negatively impacted operating profit.
The quick service segment of the restaurant industry is intensely competitive. The Burger King brand has had good success in recent years. This has contributed to rising average unit volumes at Carrols units. While we believe that competition among the top tier players will remain intense and that some of the second and third tier players are particularly challenged, we believe that Burger King is well positioned as a leading player in this segment.
The senior subordinated notes are being sold in a privately negotiated transaction without registration under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude distribution thereof in violation of the Act. The issuance has been designed to permit resale under Rule 144A.

Carrols Corporation, headquartered in Syracuse, New York, is the largest franchisee of Burger King restaurants in the U.S., operating 339 units across 13 states.

No Related Data.
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