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25 Aug 2003
MOODY'S CONFIRMS RATINGS OF CARROL'S CORP; OUTLOOK REMAINS STABLE
Approximately $400 Million of Debt Affected
New York, August 25, 2003 -- Moody's Investors Service confirmed all ratings of Carrol's Corporation.
Concerns regarding potentially adverse effects from the poorly performing
Burger King segment prompted examination of the ratings. However,
the confirmation of the ratings and continuation of the stable outlook
reflects (1) the company's success at growing Pollo Tropical and
Taco Cabana to offset weak Burger King performance, (2) Moody's
expectation that average unit volumes and margins in the Burger King segment
will begin stabilizing, and (3) Moody's opinion the company
will avoid a free cash flow deficit by adjusting the pace of the new store
Ratings confirmed are as follows:
- $232 senior secured credit facility at Ba3,
- $170 million 9 1/2% senior subordinated notes at
- Senior implied rating at B1,
- Issuer rating at B2.
The rating outlook is stable.
The ratings recognize the challenges in improving performance at the Burger
King segment because of the intense competition within the hamburger quick-service
restaurant industry, the company's ambitious intention to
rapidly grow the Pollo Tropical and Taco Cabana concepts, and the
lack of operational synergies between the three concepts. Moody's
belief that bank loan covenant compliance could become a concern,
unless the Burger King segment soon starts to recover, also impacts
our view of the risks facing the company.
However, the ratings recognize that the company's position
as the largest Burger King franchisee allows economies of scale unavailable
to smaller competitors, its ability to maintain good overall operating
and cash flow margins in spite of poor sales at Burger King, and
the continuing benefits from the fortuitous acquisitions of Taco Cabana
and Pollo Tropical. Moody's expectation that the company
will comfortably be able to cover its fixed obligations (cash interest
expense and a maintenance capital expenditures) even if customer traffic
at Burger King does not rapidly return to prior levels also benefit our
opinion of the company.
The stable outlook reflects Moody's beliefs that the company will
(1) maintain good operating and cash flow margins in spite of customer
traffic trends and (2) remain in compliance with bank agreement covenants.
Ratings would be lowered if the company overspends its available liquidity,
the company's financial flexibility directly (lower cash flow) or
indirectly (violation of bank agreement covenant) deteriorates because
of continued poor Burger King performance, or operating performance
at the new and/or existing Taco Cabana and Pollo Tropical stores falters.
Over the medium term, ratings could be raised if the Burger King
segment becomes a meaningful contributor and Pollo Tropical and Taco Cabana
profitably increase store count.
The Ba3 rating on the $232 million senior secured credit facility
(comprised of a $100 million revolving credit facility, a
$54 million Term Loan A, and a $78 million Term Loan
B) recognizes that the loan is secured by substantially all of the company's
assets including collateral assignments on the sale or transfer of all
Burger King franchise contracts. With borrowings of $33
million and letters of credit of $10 million, $57
million of the revolving credit commitment was available at the end of
June 2003. However, unless the Burger King segment begins
improving, Moody's anticipates that the company will experience
challenges remaining in compliance with financial ratio tests currently
required by the bank agreement.
The B3 rating on the senior subordinated notes recognizes, in spite
of the guarantees on a senior subordinated basis from all of the Carrol's
operating subsidiaries, that the notes are contractually subordinated
to substantial amounts of more senior debt. As of June 30,
2003, the senior debt includes the secured bank loan, $2
million of capital lease obligations, and $15 million of
trade accounts payable. The notes first become callable in December
2003 at 104.75% of par.
EBITDA margin fell to 11.3% in the first two quarters of
2003 compared to 13.3% in the same period of 2002 almost
entirely due to declines in customer traffic at Burger King. Fixed
charge coverage slightly improved to 1.3 times for the 12 months
ending June 2003 from 1.1 times during Fiscal 2001. Lease
adjusted leverage marginally decreased to 5.6 times from 5.7
times in the same time periods, even though balance sheet debt fell
by $37 million as the company paid down debt with free cash flow
and sale/leaseback transaction proceeds. Going forward, Moody's
assumes that Burger King will stabilize and that debt protection measures
will modestly improve thereafter.
Carrol's Corporation, with headquarters in Syracuse, New York,
operates 351 Burger King quick service hamburger restaurants. Carrol's
also operates or franchises 83 Pollo Tropical restaurants and 129 Taco
Cabana restaurants. Company revenue for the four quarters ending
June 2003 was about $640 million.
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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