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Rating Action:

MOODY'S UPGRADES ALL RATINGS OF DOMINO'S FOLLOWING IPO

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 of franchisees.

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 increased.

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 Term Loan.

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 billion.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Richard Baldwin
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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