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Rating Action:

Moody's downgrades Cajun Global whole-business securitization

Global Credit Research - 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, 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.

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
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