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I AGREE
11 Apr 2016
$196.5 million of asset-backed securities affected
New York, April 11, 2016 -- Moody's Investors Service has downgraded the ratings of two classes of
notes issued in the Cajun Global, LLC, whole-business
securitization. The transaction is backed by most existing and
future revenue-generating assets of Church's Holdings Corporation.
Church's is the owner and operator of quick-service restaurants
under the brand names of Church's Chicken and Texas Chicken, which
operate in the U.S. and internationally. Specific
collateral assets include intellectual property assets, franchise
and development agreements, profits from company-owned restaurants,
real estate assets and rental income.
The complete rating actions are as follows:
Issuer: Cajun Global LLC, Series 2011-1
Cl. A-1 Senior Secured Revolving Notes, Downgraded
to Ba2 (sf); previously on Jan 14, 2016 Ba1 (sf) Placed Under
Review for Possible Downgrade
Cl. A-2 Senior Secured Notes, Downgraded to Ba2 (sf);
previously on Jan 14, 2016 Ba1 (sf) Placed Under Review for Possible
Downgrade
RATINGS RATIONALE
The downgrades were prompted by weaker than expected net cash flows to
the transaction. Net cash flow deteriorated in 2015 owing to a
decline in profit margins for the transaction's company-owned
restaurants, as well as a decline in the number of restaurants that
resulted in a decline in royalties that the domestic franchises generate.
Since Moody's last downgrade action on the transaction in September
2014, the number of restaurants in the transaction has decreased
by a total of 80 restaurants. The number of domestic franchised
restaurants has fallen to 870 from 939, the number of contributed
company-owned restaurants has declined to 226 from 236, and
the number of international franchises has decreased by one to 493.
The drop in total number of domestic restaurants is the result of the
company and franchisees closing unprofitable locations. Royalties
from domestic franchised restaurants declined to $29.5mm
in 2015 from $31.4mm in 2014, in large part as a result
of the declining number of restaurants. Domestic franchised restaurants
contributed around 47% of the transaction's revenue on average
over the past three years. Although the number of international
restaurants has generally been growing, the slight net decline in
international restaurants was driven in part by the closing of all locations
in Russia.
Cajun's cash flows from contributed company-owned restaurants
have also worsened since September 2014, largely as a result of
higher costs for the company-owned restaurants, which has
resulted in these restaurants generating lower profits. Although
revenues from contributed company-owned restaurants held steady
at $203.5mm in 2015 versus $202.7mm in 2014,
cash flow to the securitization from the royalties and profits of company-owned
restaurants decreased to $11.0mm in 2015 from $15.7mm
in 2014. This decline was driven by a compression in profit margins
before royalty expenses, to 5.4% from 7.8%.
Cajun's costs rose in 2015 largely as a result of increases in poultry
prices. Meanwhile, the company increased promotions as it
faced heavy discounting from other quick-service restaurants such
as KFC. The company expects its poultry expenses to decline going
forward, which will alleviate some pressure on profit margins.
Margin compression had an outsized effect on the transaction, because
although company-owned restaurants comprised approximately 14%
of the total restaurants in the transaction in both 2014 and 2015,
cash flows from contributed company-owned restaurants comprised
only 17% of retained collections in 2015, down from 22%
in 2014. Another concern is that same-store sales growth
for company-owned restaurants was negative for the last three quarters
of 2015 after increasing during the second half of 2014 and the first
quarter of 2015.
As a result of the above performance trends, trailing 52-week
net cash flow declined to $35.2mm (of which $0.8mm
was an equity contribution) for the quarter ended December 27, 2015,
from $40.5mm for the quarter ended July 13, 2014.
As a result, the debt service coverage ratio (the ratio of the last
four quarters' net cash flow to the required interest and principal payments
for the last four quarters) declined to 1.54x for the quarter ended
December 28, 2015, down from 1.84x as of the last downgrade
action. A $1mm increase from 2014 to 2015 in the annual
scheduled principal amortization for the Class A-2 notes also affected
this trend. The current DSCR level is just above the trigger level
for cash trapping of 1.50x. Additionally, the transaction's
leverage ratio (the ratio of total outstanding debt plus amounts available
under the Class A-1 notes to annualized net cash flow) has increased
significantly over the past year as a result of the decline in cash flows.
RATING METHODOLOGY
The principal methodology used in these ratings was "Moody's Approach
to Rating Operating Company Securitizations" published in December 2015.
Please see the Ratings Methodologies page on www.moodys.com
for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the rating:
Up
Improvements in collections and net cash flows, leading to decreases
in leverage and increases in the debt service coverage ratio.
Down
Further reductions in collections and net cash flows, leading to
increases in leverage and declines in the debt service coverage ratio.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions of the disclosure form.
The analysis relies on a Monte Carlo simulation that generates a large
number of collateral loss or cash flow scenarios, which on average
meet key metrics Moody's determines based on its assessment of the
collateral characteristics. Moody's then evaluates each simulated
scenario using model that replicates the relevant structural features
and payment allocation rules of the transaction, to derive losses
or payments for each rated instrument. The average loss a rated
instrument incurs in all of the simulated collateral loss or cash flow
scenarios, which Moody's weights based on its assumptions
about the likelihood of events in such scenarios actually occurring,
results in the expected loss of the rated instrument.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
For ratings issued on a program, series or category/class of debt,
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to each rating of a subsequently issued bond or note of the same series
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rating action for securities that derive their credit ratings from the
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rating that may be assigned subsequent to the final issuance of the debt,
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the rating.
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for additional regulatory disclosures for each credit rating.
Thomas Meehan
Analyst
Structured 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
Amelia (Amy) Tobey
Senior Vice President/Manager
Structured 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 downgrades Cajun Global whole-business securitization
No Related Data.
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