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Rating Action:

Moody's assigns B2 CFR to Carrols Holdco Inc., rates proposed bank facilities B2

21 Mar 2019

New York, March 21, 2019 -- Moody's Investors Service ("Moody's") today assigned Carrols Holdco Inc. ("Carrols") a B2 Corporate Family Rating ("CFR"), B2-PD Probability of Default rating, and SGL-2 Speculative Grade Liquidity Rating ("SGL"). Moody's additionally assigned B2 ratings to the company's proposed $125 million senior secured revolving credit facility and $400 million senior secured term loan B. The ratings outlook is stable.

Proceeds from the proposed $400 million senior secured term loan B, along with common and preferred equity totaling approximately $138.5 million, will be used to acquire 166 Burger Kings and 55 Popeyes Louisiana Kitchen ("Popeyes") restaurants through a merger with Cambridge Franchise Holdings, LLC ("Cambridge"), redeem Carrols Restaurant Group, Inc.'s existing $275 million 8% senior secured 2nd lien notes due 2022, as well as pay related premiums, fees and expenses.

"The assigned B2 CFR reflects the company's solid earnings and credit metrics that will continue to strengthen as management focuses on driving sales, continues development and acquisitions, and manages costs," stated Adam McLaren, Moody's Analyst. "The acquisition of 166 Burger Kings and 55 Popeyes as part of the Cambridge merger transaction increases Carrols' position and growth potential within the Burger King system. The acquisition also provides Carrols a second concept to grow and develop in mostly lower costs geographies with only a modest increase in leverage", stated McLaren. As a result of the transaction, Moody's anticipated a pro-forma increase in leverage to around 5.2x from 4.9x as of the LTM period ended 12/30/2018.

The existing ratings of Carrols Restaurant Group, Inc., including the company's B2 Corporate Family Rating, B2-PD Probability of Default rating, and B2 rated 8% senior secured 2nd lien notes, remain unchanged and will be withdrawn at the close of the proposed refinancing and merger transaction. Additionally, upon completion, it is expected that Carrols Holdco Inc. (new borrower of credit facilities) will be renamed Carrols Restaurant Group, Inc. with its shared registered on the Nasdaq under the current trading symbol of "TAST".

Assignments:

..Issuer: Carrols Holdco Inc.

.... Probability of Default Rating, Assigned B2-PD

.... Speculative Grade Liquidity Rating, Assigned SGL-2

.... Corporate Family Rating, Assigned B2

....Senior Secured Revolver, Assigned B2 (LGD3)

....Senior Secured Term Loan B, Assigned B2 (LGD3)

Outlook Actions:

..Issuer: Carrols Holdco Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

Carrols benefits from its material scale and position as the largest franchisee within the Burger King Corporation ("BKC") system, reasonable credit metrics and good liquidity. Also considered is the significant ownership and Board representation by Restaurant Brands International, Inc. ("RBI") the owner of Burger King as well as the brands position among its peers and well balanced day-part division. The company's planned merger with Cambridge Franchise Holdings strengthens Carrols position as the largest franchisee with Burger King and provides additional runway for growth in the system. Cambridge also gives Carrols a second brand concept in Popeyes, providing a level of diversification and additional avenue for growth in Southern states which are primarily lower wages states. Carrols' is constrained by its acquisition and development growth strategy that drive both integration risks and risk associated with large capital outlays for new units and remodels that result in negative free cash flow and are dependent on strong restaurant level performance and economics to drive operating results. The company is also constrained by the competitive and promotional operating environment for Burger King and Popeyes.

The stable outlook reflects Moody's view that both BKC's strategic initiatives and Carrols experience in operating and integrating Burger King and Popeyes restaurants should result in a steady improvement in earnings and credit metrics. The outlook also reflects Moody's view that revenue and earnings from recent acquisitions and sales lift from ongoing unit remodeling should provide additional improvement to earnings and liquidity over time.

Factors that could result in an upgrade include sustained improvement in credit metrics and free cash flow driven in part by positive same store sales and improved unit-level economics at acquired restaurants. A higher rating would require debt to EBITDA approaching 4.5 times and EBIT coverage of interest expense of over 2.0 times on a sustained basis. A higher rating would also require generating positive free cash flow on a consistent basis while maintaining good liquidity.

Factors that could result in a downgrade include any deterioration in operating performance, particularly a sustained deterioration in traffic or integration issues with acquired restaurants. Specifically, a downgrade could occur if EBIT coverage of interest expense fell below 1.2 times or debt/EBITDA increased towards 6.0 times on a sustained basis. In addition, any deterioration in liquidity for any reason could lead to a downgrade.

The principal methodology used in these ratings was Restaurant Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Carrols Holdco Inc., to be renamed Carrols Restaurant Group, Inc. following the merger with Cambridge Franchise Holdings, LLC, owns and operates 1015 Burger King and 55 Popeyes Louisiana Kitchen restaurants through franchise agreements in 23 Northeastern, Midwestern, Southern and Southeastern states. Revenue for the last twelve month period ended 12/30/2018 was about $1.5 billion on a pro-forma basis.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Adam McLaren
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Janice Hofferber, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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