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Announcement:

Moody's changes O'Charley's rating outlook to negative

03 Mar 2011

Approximately $125 million rated debt securities affected

New York, March 03, 2011 -- Moody's Investors Service today revised the rating outlook of O'Charley's Inc.'s ("O'Charley's") to negative from stable. O'Charley's B2 Corporate Family rating (CFR) and B3 senior subordinated notes rating, remain unchanged. Its speculative grade liquidity rating of SGL-3 was affirmed.

The following ratings were unchanged and LGD assessments updated:

Corporate Family rating at B2

Probability of Default rating at B2

$125 million 9% senior subordinated notes due 2013 to B3 (LGD-5, 71%) from B3 (LGD-5, 72%)

Speculative grade liquidity rating at SGL-3

The negative rating outlook reflects Moody's view that O'Charley's debt protection measures would remain weak for the B2 rating category in the intermediate term due to continued pressure on its revenue and operating margin. Particularly, its debt/EBITDA would likely rise and sustain above 5.0x if EBITDA erodes further in 2011. For fiscal year 2010, the company reported a year over year EBITDA decline of nearly 34% as a result of lower revenue largely due to negative same store sales (SSS) and higher food and restaurant operating costs. We estimate that O'Charley's financial leverage as measured by debt/EBITDA was around 5.0x at year end 2010(incorporating Moody's analytical adjustments), approximately one full turn higher than the prior year.

Moody's is concerned that the persistently negative SSS at the company's anchor brand- O'Charley's concept (which represents roughly 2/3 of the company's restaurant revenue and experienced the most significant decline in 2010 EBITDA among all three concepts)and its general lack of pricing power in a rising commodity input cost environment, would erode the company's already thin operating margin and other key credit metrics. "However, we did not change the B2 CFR today as we have seen some early signs of recovery as indicated by the decelerated negative SSS trend in the most recent quarters at O'Charley's, " explained Moody's analyst John Zhao. That being said, the elevated gasoline prices which had historically hurt restaurant sales and escalating commodity prices could derail the early recovery. O'Charley's ratings could be downgraded if negative same store sales persists and margin deteriorates further in the next 6-12 months.

The B2 Corporate Family rating continues to reflect O'Charley's below average operating margins, weak credit metrics as well as the challenges the company is facing in reversing the negative same store sales and traffic trends. The ratings positively consider established brand names and concept/geographic diversification. The ratings also anticipate the company will continue to generate modest level of free cash flow primarily thanks to the low capital spending. While the low spending level is required by the credit agreement as an effective measure to conserve liquidity, the current annual capital expenditure of approximately $15 million is not sustainable in Moody's view (given that depreciation level has substantially exceeded capital expenditures) and could be detrimental to the long-term brand strength and image if the stores are not refreshed timely.

The affirmation of SGL-3 reflects the company's adequate liquidity profile, highlighted by modestly positive free cash flow, full availability under its $45 million revolving credit facility (excluding $12.6 million outstanding letters of credit) and its significant real estate ownership which provides for alternate liquidity in the future. Additionally, the company doesn't have any near term debt maturities. Our SGL assessment also incorporates the company's cash balance of $29.7 million as of December 26, 2010. SGL rating would be downwardly pressured if the cushion under the leverage covenant becomes modest in the next twelve months should EBITDA continue to decline.

For more information, please refer to an updated credit opinion on moodys.com

The principal methodology used in rating O'Charley's was Moody's Global Restaurant Industry Methodology, published in June 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

O'Charley's, Inc., headquartered in Nashville Tennessee, is an owner, operator, and franchisor of casual dining concepts that include O'Charley's, Ninety-Nine Restaurant & Pub, and Stoney River Legendary Steaks. For the twelve months ending December 26, 2010, the company reported revenues of approximately $830 million.

New York
Zhenyu Zhao
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 changes O'Charley's rating outlook to negative
No Related Data.
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