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15 Jul 2004
MOODY'S UPGRADES ALL RATINGS OF DOMINO'S FOLLOWING IPO
Approximately $1.06 Billion of Debt Affected.
New York, July 15, 2004 -- Moody's Investors Service upgraded all ratings of Domino's,
Inc following the July 12, 2004 Initial Public Offering of its non-rated
parent Domino's Pizza, Inc. The rating upgrade was prompted
by the meaningful improvements in debt protection measures resulting from
the company's intention to redeem a portion of the 8.25%
senior subordinated note (2011) issue with the entire $131 million
of proceeds from the primary equity placement and Moody's expectation
that Domino's will continue to use excess cash flow to pay down
bank debt. According to the optional redemption provision of the
senior subordinated note (2011) indenture, the company has the right,
but not the obligation, to call up to 40% of the issue at
108.25% of par with proceeds from primary equity offerings.
However, limiting the ratings are the company's intention
to immediately begin declaring quarterly dividends, Moody's
belief that domestic growth in the pizza category will remain slow,
and the unpredictable effectiveness of marketing initiatives. The
rating outlook is stable.
Ratings upgraded are as follows:
$656 million secured bank facility to Ba3 from B1,
$403 million 8 ¼% senior subordinated notes
(2011) to B2 from B3,
Senior Implied Rating to Ba3 from B1, and the
Issuer Rating to B1 from B2.
The ratings recognize the company's leveraged financial condition,
Moody's belief that the domestic pizza category is a mature category
that will grow slowly, and the meaningful fixed charge burden of
interest payments, maintenance capital expenditures, and cash
dividends. The possibility that consumer preferences may evolve
away from the company's narrow product range, the unpredictable
effectiveness of marketing programs given Moody's belief that substantial
promotional activity is required to maintain stable average unit volume,
and the vulnerability to cheese price volatility (the company buys about
200 tons per day) also constrain the ratings.
However, the ratings also consider management's track record
of using most excess cash flow to pay down debt, the steady franchisee
royalty stream as a disproportionately large generator of operating profits,
and the intangible value of the well-recognized "Domino's"
trade name. The ratings also recognize the simple business model
that requires franchisees to invest their own capital in most newly developed
stores, the diversity (geographically and from many franchisees)
of revenue inflows, and the greater financial flexibility through
access to the public equity markets.
The stable outlook reflects that, in spite of the new equity,
ratings are unlikely to again move upward until better operating performance
(such as increased average unit volume and restaurant profitability) allows
the company to further improve debt protection measures through paying
down debt. Over the longer term, ratings could move upward
as the cushion to cover fixed charges exceeds 2.5 times and lease
adjusted leverage falls towards 4 times and the Domino's system expands
both from new store development (particularly franchisees opening stores
both domestically and internationally) and existing store performance.
Ratings would be negatively impacted following a decline in corporate
operating performance, permanent borrowings on the revolving credit
facility, or financial difficulties at a significant proportion
The Ba3 rating on the bank facility (comprised of a $125 million
Revolving Credit Facility and a $531 million Term Loan) recognizes
the first priority lien on virtually all of the company's assets.
The bank loan is not notched above the senior implied rating because of
(1) its relatively large weight in the company's capital structure
and (2) Moody's belief that fair market value for important assets
such as the "Domino's" trade name would materially decline
near a distressed scenario. The entire Revolving Credit Facility
commitment is available except for about $23 million in Letters
of Credit primarily for casualty insurance programs.
The B2 rating on the senior subordinated notes recognizes that the notes
are contractually subordinated to a sizable amount of more senior debt,
but enjoy the guarantees of most of the domestic operating subsidiaries.
The more senior debt includes the bank loan plus about $49 million
in trade accounts payable. Relative to the pre-IPO capital
structure, the equity cushion supporting the subordinated debt has
Pro-forma for using all net equity proceeds to retire debt,
as of March 21, 2004 lease adjusted leverage equaled 4.9
times and fixed charge coverage was 2.2 times. In the first
quarter of 2004, domestic comparable store sales declined 0.9%
as promotional activities failed to stimulate incremental sales.
EBITDA margin grew to 15.8% from 15.4% in
the same period of 2003 largely because of continued growth in high-margin
royalty payments from international franchisees. Over the next
several years, Moody's anticipates that most excess cash flow
beyond relatively small mandatory Term Loan amortization, capital
investment, and cash dividends will be dedicated to prepaying the
Domino's, Inc, headquartered in Ann Arbor, Michigan,
operates 595 and franchises 6878 pizza delivery restaurants in the United
States and more than 50 international markets. Revenue for the
twelve months ending March 21, 2004 exceeded $1.3
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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