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Rating Action:

MOODY'S RATES BRINKERS SENIOR CONVERTIBLE DEBENTURES Baa2; OUTLOOK IS STABLE.

10 Sep 2001
MOODY'S RATES BRINKERS SENIOR CONVERTIBLE DEBENTURES Baa2; OUTLOOK IS STABLE.

Approximately $250 Million of Debt Securities Affected.

New York, September 10, 2001 -- Moody's Investors Service assigned a Baa2 rating for the first time to the $250 million zero coupon senior convertible debentures of Brinker International, Inc. Moody's rating reflects the company's track record as a consistent restaurant operator, its strong market position in the casual dining segment, adequate debt protection measures, as well as the company's conservative financial policies. The rating outlook is stable.

Ratings assigned:

Senior unsecured zero coupon convertible debentures at Baa2.

Brinker is issuing the debentures to refinance existing bank debt, to fund the company's pending acquisition of Sydran Food Services III, L.P., and for general corporate purposes. The debentures will mature in 2021. Holders of the debentures may convert them into a pre-determined number of the company's common stock during defined conversion periods. Holders can require the company to repurchase the debentures in 2003, 2005, 2011, and 2016. Brinker has the right to pay the purchase price in cash, common stock or a combination of both. Moody's will factor this put option into our analysis of the company's short-term liquidity. The company recently entered into an asset purchase agreement with its franchise partner, Sydran, to acquire 39 Chili's Grill & Bar restaurants, as well as future development rights for Chili's in all or portions of 14 states.

The ratings reflect Brinker's geographic diversification with 1,143 system-wide restaurants in 47 states and 20 countries. The company has a consistent track record of operating profitably and growing its unit base in a financially prudent manner. The company's operating margins have grown steadily from about 8% in 1996 to slightly over 10% at fiscal year end 2001. During this time period the company grew its asset base by over 170%. Since 1998 Brinker has been able to fund all of its capital expenditures from internally generated cash flow and we expect the company to continue to fund growth in this manner. Brinker's has successfully grown its largest concept, Chili's (66% of total units), into a national brand, and the company has been able to maintain its appeal to consumers since it first opened in 1975.

Brinker's On The Border concept (which represents 11% of total units) has been experiencing negative comparable sales for about a year. Since these negative trends emerged, Brinker has not added new units (except the repurchase of 8 franchised stores) as it chose to focus on restructuring the menu to appeal better to the consumer and to gain efficiencies in the kitchen. Moody's expects the company's efforts of the past year will begin to take hold once they begin to advertise and market the concept again this fall.

Debt protection measures are adequate for rating category with Adjusted Debt to EBITDAR at 1.95x, and Total Coverage of 7.19x. Debt is adjusted for off-balance operating leases. The ratings reflect our expectation that management will continue to maintain a high degree of financial flexibility given the cyclical nature of the restaurant industry, as well as the need to constantly refresh each concepts' menu and image in order to keep up with changing consumer tastes and habits. Brinker mitigates this risk to some degree with is multiple food concepts across various price points. The company has also demonstrated a conservative approach to development by entering into concept partnerships, (such as Rockfish Seafood Grill, in the seafood category), or small concept acquisitions (such as Big Bowl, an Asian food concept.)

We have also considered the positive demographic and lifestyle changes that are favorable to the industry. These trends include an aging population and more dual-income families with more disposable income, and the increasing amount of money spent on meals prepared away from the home. Additionally, industry-wide unit growth trends have moderated since 1997 indicating that supply may not be too far ahead of demand. Despite these favorable trends, Moody's believes the restaurant industry will continue to be vulnerable to economic cycles since eating out is a discretionary expenditure that can be cut back during difficult economic times. The casual dining segment of the industry has grown significantly since the last economic downturn in 1990-1991 making it difficult to predict the degree to which this segment will be impacted by the current downturn.

Brinker, along with other industry participants, will be challenged to maintain margins given the recent rise in labor, energy and certain commodity costs. The effects of the weakening economy is beginning to be reflected through moderating increases in same store sales that can be attributed mainly to a deceleration or a decline in customer traffic. Brinker is well positioned in the current rating category and should be able to absorb the negative effects of the current economic downturn.

The ratings consider event risk associated with the company's active share repurchase program, and small acquisitions. Moody's expects Brinker to finance these activities in manner that is supportive of current ratings. We also note that although the company owns eight concepts, three comprise 91% of total units.

The outlook is stable reflecting our view that the company can manage through current economic weakness and that management will grow its business in a manner that preserves its financial flexibility.

Brinker, based in Dallas, Texas, operates several casual dining concepts, namely, Chili's Grill & Bar, Romano's Macaroni Grill, On The Border Mexican Cafe, Maggiano's Little Italy, Big Bowl, Cozymel's Coastal Mexican Grill, Corner Bakery and eatZi's Market and Bakery. The Chili's, Macaroni Grill and On The Border concepts are the largest, representing about 66%, 14% and 11%, respectively, of total system units. Brinker's owns and operates about 79% of system-wide units, and franchises or enters into joint ventures for the remainder. Total revenues in the fiscal year ended were about $2.5 billion.

New York
Angela Jameson
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Peggy Holloway
Vice President - Senior Analyst
Corporate Finance
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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