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Rating Action:

Moody's assigns B3 to proposed bank debt of Red Lobster Management, LLC; outlook stable

Global Credit Research - 01 Jul 2014

Approximately $425 million of rated debt securities affected

New York, July 01, 2014 -- Moody's Investors Service today assigned a B3 rating to Red Lobster Management, LLC's proposed $50 million guaranteed senior secured revolving credit facility and $375 million guaranteed senior secured term loan. A B3 Corporate Family rating, B3-PD Probability of Default Rating and stable rating outlook were also assigned.

This is a first time ratings assignment to Red Lobster Management, LLC ("Red Lobster"). Moody's ratings are subject to the receipt and review of final documentation.

New Ratings Assigned:

Corporate Family Rating at B3

Probability of Default Ratings at B3-PD

$50 million guaranteed senior secured revolver due 2019 at B3 (LGD4)

$375 million guaranteed senior secured term loan due 2021 at B3 (LGD4)

RATINGS RATIONALE

The B3 Corporate Family Rating reflects Red Lobster's weak and declining operating performance, high pro forma lease-adjusted debt/EBITDA of about 6.0 times, and the challenge surrounding Golden Gate's ability to turn the company's performance around. Positive rating consideration is given to Golden Gate's experience with respect to buying and addressing under-performing restaurant and other consumer related companies, along with the company's pro forma liquidity profile that includes $125 million of unrestricted cash and a $50 million undrawn revolver.

The stable outlook reflects Red Lobster's pro forma fixed charge coverage of about 1.5 times, a level typically associated with a 'mid-B' Corporate Family Rating, according to Moody's Global Restaurant Methodology. The pro forma fixed-charge coverage ratio is based on about $23 million of interest related to the funded debt portion of the transaction along with one-third of the annual lease payment, about $53 million.

Proceeds from the proposed credit facilities along with a minimum of $200 million of cash common equity contributed by Golden Gate Capital Management ("Golden Gate") will be used to fund a portion the acquisition of the Red Lobster brand and operations from Darden Restaurants, Inc. (Baa3 on review for downgrade). Golden Gate is also representing that it will fund enough cash common equity to ensure $125 million of pro forma cash on the balance sheet. The transaction is scheduled to close within Red Lobsters first fiscal quarter of 2015.

In a separate but related transaction, the substantial majority of the physical real estate assets of Red Lobster will be sold by Darden to American Realty Capital Properties, Inc. (Baa3 stable), a real estate investment trust. Red Lobster will simultaneously enter into master lease agreements with American Realty where it will agree to make lease payments related to the master lease of about $125 million annually to American Realty in exchange for use of the real estate. The estimated present value of these lease payment is about $1 billion arrived at using an eight times multiple of the annual master lease payment.

The B3 rating assigned to the credit facilities, the same as Red Lobster's Corporate Family Rating, considers that these credit facilities represent the entire funded debt portion of the company's pro forma balance sheet, and a majority of the company's pro forma debt capital structure including operating leases which have an annual lease payment obligation of about $35 million.

The operating leases are separate and distinct from the master leases. While the operating leases provide some credit support to Red Lobster's funded debt -- although not enough to notch the rating on the credit facilities above the Corporate Family Rating -- Moody's does not consider the master lease payments as a form of credit support for LGD purposes. In a master lease, the rejection of one lease requires the rejection of all leases. As a result, the benefit of being able to reject individual leases -- typically considered a form of credit support to more senior funded debt -- is not available to Red Lobster. Red Lobster's creditors are incentivized to maintain the master lease as it is their primary asset.

The B3-PD Probability of Default Rating considers the "covenant-lite" characteristics of this transaction. The credit facilities are expected to included a first-lien leverage ratio, the level of which has not yet been determined. However, that covenant only takes effect if/when the revolver amount outstanding plus swing loans and letters of credit exceed 30% of the $50 million revolver limit. At this time, Moody's is not aware of any other financial covenants being considered. Additionally, it is Moody's understanding that there will be a provision in the credit agreement that states any default in lease obligations would trigger a default in the credit agreement, but only if the leases in default are categorized as capital leases (not yet determined) and total more than $25 million.

Ratings could be lowered if it appears that the turnaround strategy employed by Red Lobster's new owner will not result in a stabilization of the company's operating results. Ratings could also be lowered if there is a default on any portion of the master lease. A higher rating would require evidence of turnaround including the ability to achieve and maintain lease-adjusted debt/EBITDA below 5.0 times and fixed-charge coverage above 1.75 times. While rating improvement is possible over the longer-term, the amount of rating improvement is limited by the fact that Red Lobster will be owned by a private equity sponsor whose interests may come ahead of creditors.

Red Lobster owns and operates 705 Red Lobster seafood restaurants throughout North America. The company has agreed to be purchased by Golden Gate Capital, a private equity sponsor, and has been operating as a division of Darden. Red Lobster generates about $2.5 billion of annual revenue.

The principal methodology used in this rating was Global Restaurant Methodology published in June 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

William V. Fahy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Janice Ann Hofferber
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns B3 to proposed bank debt of Red Lobster Management, LLC; outlook stable
No Related Data.
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