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08 Mar 2011
New York, March 08, 2011 -- Moody's Investors Service today affirmed CKE Restaurant, Inc's
(CKE) debt ratings, including the company's B2 Corporate Family
Rating, and assigned a Caa1 rating to the proposed $175 million
PIK Toggle Notes (PIK Notes) due 2016 to be issued by its direct parent
holding company, CKE Holdings, Inc. (CKE Holdings).
The rating outlook was changed to negative from stable.
Proceeds from the PIK Notes will be used to fund a distribution to the
equity sponsor, Apollo Management (Apollo). The Notes will
be senior unsecured obligations of CKE Holdings, and will not be
guaranteed by any entity in the corporate group. Interest on the
notes is payable in cash or payment-in-kind at CKE Holdings'
option.
Moody's took the following rating actions for CKE Holdings, Inc.:
-- $175 million senior unsecured PIK Toggle Notes
due 2016 assigned at Caa1 (LGD6, 91%).
Moody's took the following rating actions for CKE Restaurants, Inc.:
-- Corporate Family Rating affirmed at B2;
-- Probability of Default Rating affirmed at B2;
-- $100 million 1st lien senior secured revolver
due 2015 affirmed at Ba2 (LGD1, 2%) from (LGD1, 4%);
-- $600 million 2nd lien senior secured notes due
2018 affirmed at B2 (LGD3, 44%) from (LGD3, 49%);
-- Speculative Grade Liquidity Ratings affirmed at SGL-2
The ratings outlook is negative
RATINGS RATIONALE
The outlook change to negative reflects the increased risk profile due
to higher enterprise-wide debt levels, as well as management's
shift to a more aggressive financial strategy at a time when the business
recovery has not yet gained full traction and may still be somewhat fragile.
Using preliminary results for the fiscal year ended January 31,
2011, Moody's estimates that pro forma leverage will exceed 6.5
times with only a moderate level of improvement expected over the intermediate
term.
CKE Holdings' B2 Corporate Family Rating reflects the company's
weak pro forma debt protection metrics and our expectation that the company's
operating performance, particularly its Carl's Jr.
segment, will continue to be adversely impacted by historically
high unemployment within its target demographic and ongoing intense competition.
The rating also reflects CKE's reasonable scale, multiple concepts
which add diversity, diversified day part which boosts returns on
invested capital, and good liquidity.
The B2 rating on the company's 2nd lien senior secured notes reflects
a one-notch differential from the B1 rating indicated by Moody's
Loss Given Default methodology. Given the negative ratings outlook,
the actual B2 rating reflects Moody's concern for a near term ratings
reversal should operating performance and metrics not improve.
In addition, the proposed notes would result in an unfavorable debt
maturity profile for holders of CKE Restaurants' $600 million
2nd lien notes due 2018, as the proposed notes will mature in 2016
(approximately two years ahead of the 2018 notes).
Factors that could result in a downgrade include a material increase in
debt levels beyond what is expected as part of the proposed transaction,
or should debt protection metrics fail to show improvement over the next
year. Specific metrics include debt to EBITDA remaining above 6.5
times or EBITA coverage of interest sustained below 1.1 times.
The ratings could also be downgraded in the event liquidity were to deteriorate
materially.
While unlikely in the near term, factors that could result in an
upgrade include a sustained pattern of positive same store sales growth
and moderating debt levels resulting in leverage of about 4.5 times
and EBITA coverage of interest approaching 2.0 times. A
higher rating would also require ample liquidity that includes reasonable
availability under its revolving credit facility.
Following the completion of the transaction, the Corporate Family,
Probability of Default and Speculative Grade Liquidity Ratings will be
moved to CKE Holdings from CKE Restaurants, Inc.
The principal methodologies used in this rating were Global Restaurant
Industry published in July 2008, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
CKE Restaurants, Inc. owns, operates, and franchises,
approximately 3,159 quick-service restaurants (QSR) under
the brand names Carl's Jr. and Hardee's. Annual revenues
are approximately $1.3 billion.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Michael M. Zuccaro
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns Caa1 rating to CKE Restaurant's proposed notes; B2 CFR affirmed; outlook negative
No Related Data.
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