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17 Nov 2000
MOODY'S ASSIGNS Ba3 RATING TO PROPOSED BANK FACILITY OF CARROLS CORPORATION AND DOWNGRADES SENIOR SUBORDINATED NOTES TO B3
Approximately $420 Million of Debt Affected.
New York, November 17, 2000 -- Moody's Investors Service assigned a Ba3 rating to the proposed $250
million senior secured credit facility of Carrols Corporation.
Moody's also lowered the $170 million 9.5% senior
subordinated notes due 2008 to B3 from B2. The company's senior
implied rating was lowered to B1 from Ba3 and the issuer rating fell to
B2 from B1. We will withdraw the Ba3 rating on the existing $155
million credit facility once this transaction is complete. The
rating outlook is stable. This concludes the review for possible
downgrade that commenced on October 11, 2000.
The rating of the proposed credit facility and review of the other ratings
was prompted by the company's intention to buy the Taco Cabana restaurant
chain for total consideration of $154.5 million, or
about 6 times trailing twelve months EBITDA. Taco Cabana operates
or franchises a chain of 126 Tex-Mex themed quick service restaurants
principally in the San Antonio, Houston, and Austin marketplaces.
Carrols will use the $250 million senior secured credit facility
to complete the tender offer for all Taco Cabana's equity, to refinance
Taco Cabana's debt, and to refinance Carrols existing $155
million senior secured credit facility.
The ratings reflect the company's leveraged financial condition (especially
when adjusted for off balance-sheet lease obligations), the
intense competition within the quick service restaurant industry,
the relatively geographic concentration of each concept, and the
lack of obvious operational synergies between the three concepts.
The ratings also consider the unexpectedly weak performance of the Burger
King system over the past two years (even though Carrols has generally
performed better than the overall Burger King system) and our opinion
that a recovery is not yet visible.
However, the ratings recognize that the Burger King name is very
well known and the company's position as the second largest Burger King
operator allows economies of scale not available to smaller competitors.
Revenue diversification (from the Pollo Tropical acquisition in July 1998)
also supports the ratings during periods that Burger King performs poorly.
The $250 million senior secured credit facility includes a $100
million five-year revolving credit facility, a $75
million five-year Term Loan A, and a $75 million seven-year
Term Loan B. Term Loan B has nominal amortization for the first
five years. The Ba3 rating on the credit facility considers that
this loan is secured by substantially all of the company's real and personal
property, the stock of the operating company, and collateral
assignments on the sale or transfer of all Burger King franchise agreements.
Even given that the company owns a small fraction of the restaurant real
estate, we believe that the security provides reasonable protection.
The B3 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 significant amount of more senior debt. A modest test for
incurring additional senior debt (EBITDA to interest test of 2 times pro-forma
for acquisitions versus current actual coverage of 2.6 times) also
impacts the ratings.
The stable outlook considers the expected successful acquisition of Taco
Cabana (as occurred with Pollo Tropical) and our opinion that, even
if Burger King performance remains lackluster, the company will
be able to modestly delever going forward. A significant Burger
King turnaround that provides the company with cash to delever sooner
than anticipated would benefit the ratings.
The entire Burger King system has experienced difficulties for more than
two years as measured by market share (within the hamburger segment) and
same store sales. Customer counts have fallen as the franchisor
has been unable to find a marketing strategy that effectively lures customers
away from strong competitors. Same store sales at the Burger King
restaurants operated by Carrols have generally fared better than the Burger
King system average, but results have been weak since the end of
1998. During 1998, the company's Burger King division achieved
a segment operating margin of 8.8% versus 6.1%
in 1999 and 7.3% for the twelve months ending September
Diversification away from Burger King (last twelve months revenue $378
million) has benefited the company over the last two years. Pollo
Tropical (last twelve months revenue $88 million) has offset the
margin decline that otherwise would have occurred if Carrols had continued
to only operate Burger King restaurants. The Pollo Tropical segment
operating margin of 17.6% for the twelve months ending September
2000 has improved by about 1.5% since becoming part of Carrols.
Corporate operating margin of 7.2% for the twelve months
ending September 2000 compared to operating margins of 7.6%
in 1998 and 6.2% in 1999. We believe that the addition
of Taco Cabana (last twelve months revenue $166 million) will further
insulate the company from Burger King performance, but do not anticipate
that Taco Cabana will have operating margins as high as those of Pollo
Given that the company's three concepts have different menu focuses and
operate in widely separated geographic regions, we do not foresee
substantial synergies from adding Taco Cabana to the company. However,
lessons learned from the successful addition of Pollo Tropical should
lessen the risks involved in purchasing Taco Cabana. We believe
that Taco Cabana management will singlemindedly concentrate on restaurant
operations after eliminating the distractions and short-term pressures
of managing a small publicly traded company.
For the twelve months ending September 2000, EBITDA covered interest
by 2.6 times and adjusted debt to EBITDAR equaled 5.4 times.
EBITDA margin grew to 12.4% in the first nine months of
2000 versus 11.1% in the corresponding period of 1999 as
margins at both Burger King and Pollo Tropical slightly improved in the
most recent period. Pro-forma for the Taco Cabana acquisition,
leverage and interest coverage were about the same as actual results for
the most recent twelve months. Going forward, we anticipate
that the company will use most cash flow in excess of interest payments
and moderate capital expenditures to pay down debt. We expect that
interest coverage will exceed 3 times and adjusted leverage will fall
below 5 times within the next two years.
Carrols Corporation, headquartered in Syracuse, New York,
operates 45 Pollo Tropical Latin-themed quick service restaurants
and, as the second largest Burger King franchisee, 354 Burger
King quick service hamburger restaurants.
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
No Related Data.
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