MOODY'S LOWERS SHONEY'S SUB DEBT RATING TO B3, ASSIGNS Ba3 RATING TO ITS BANK FACILITIES,AND CONFIRMS B3 SUB RATING ON TPI ENTERPRISES
New York, 01-21-97 -- Moody's Investors Service lowered the rating on Shoney's, Inc.'s subordinated convertible zero coupon debentures (8.5% LYONS) due 2004 to B3 from B2, assigned a Ba3 rating to its secured bank credit facilities, and confirmed the B3 rating on Shoney's subsidiary, TPI Enterprises' 8.25% convertible subordinated debentures due 2002.
The ratings reflect the increased leverage following Shoney's acquisition of TPI in September 1996, the company's ongoing but slow turnaround, and the intense competition in the U.S. family and quick service dining segments. The ratings also recognize Shoney's need for continuing investment in its restaurant portfolio in the coming years, leaving little free cash flow to reduce debt.
However, the ratings are supported by the company's well established position in the family and quick-food dining segments, with 957 company operated and 518 franchised units. While operating performance has been weak, it is starting to improve and the ratings reflect the expectation that the deterioration in operations has stabilized. Ratings also recognize that the company's portfolio of restaurants includes five separate dining concepts, and that asset sales could reduce balance sheet leverage.
The bank credit facilities consist of a $189.6 million reducing revolving credit facility due October 1999, and a $100 million bridge loan facility which converts to a term loan in May 1998 with a final maturity date of October 1999. The bridge loan is secured by the assets acquired in the TPI reorganization (primarily the 243 restaurants formerly owned by TPI). The revolving credit facility is secured by a pledge of Shoney's unencumbered assets (which include the stock of a wholly owned real estate subsidiary that owns 179 of the company's restaurant properties). The difference between the subordinated rating and the bank and bridge loan rating reflects the benefit that the collateral will likely provide the bank lenders in a distressed scenario.
Shoney's commenced restructuring its operations in 1995 with the sale of its Lee's Famous Recipe quick service chain in September and Mike Rose Foods in November, three weeks after the company's October fiscal year end. The $83.5 million proceeds from the two transactions totaled were used to reduce debt.
The company's Shoney's units have experienced declining comparable sales and customer counts for several years. To strengthen the chain's market position, reinvigorate its image, and reverse the slide in sales, management has implemented a number of programs since 1993. Remodeling and replacing poorer performing units is central to Shoney's repositioning program. The new management team also implemented several programs to improve the quality and service of the restaurants including offering general restaurant managers the opportunity to participate in the profits (the manager is required to make an approximate $15,000 investment to participate). These programs are leading to declining levels of customer complaints, but have not yet made a material contribution to operating cash flow.
The company's image was impaired by a television news program in the fourth quarter of fiscal 1995 on the cleanliness of the restaurant industry, which included one of Shoney's restaurants. This led to significant sales declines. The EBITDA margin continued to shrink through the third quarter of fiscal 1996 (down from 13% in the prior year's period to 11.5% in the August 1996 period), but rose to 14.2% in the fourth quarter. While the TPI restaurants have lower average sales and margins than Shoney's company-owned restaurants, we expect margins will likely increase over time as the company leverages its commissary operations and closes underperforming TPI and Shoney's units.
Debt leverage remains high, with total debt (includes the litigation settlement reserve) after the TPI acquisition 6.2 times proforma EBITDA. We anticipate that leverage will likely decline to below 5.0 times EBITDA as the company cycles past the exceptionally weak fourth quarter of fiscal 1995, and starts to realize some of the anticipated benefits of the TPI acquisition.
Shoney's Inc., headquartered in Nashville, Tennessee, operates 544 Shoney's restaurants, 379 Captain D's quick service restaurants and 34 casual dining restaurants, and franchises 519 restaurants.
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