TEXT-S&P rates Wendy's International credit facility 'BB-'
April 9 - Overview -- Wendy's is refinancing debt, including its bank credit facilities and 10% senior notes. -- We are assigning our 'BB-' issue level and '2' recovery ratings to Wendy's proposed credit facilities. -- All other ratings remain unchanged, including the 'B+' corporate credit rating. -- The stable outlook reflects our expectation that execution of its capital reinvestment plans and growth initiatives will support good operating results in 2012 despite cost pressures, and its financial risk profile will remain "highly leveraged" under our criteria. Rating Action On April 9, 2012, Standard & Poor's Ratings Services assigned a 'BB-' issue-level rating and a '2' recovery rating to Wendy's International Inc.'s proposed $1.3 billion bank credit facilities. Wendy's International is owned by The Wendy's Co. The proposed credit facilities include a $1.125 billion seven-year term loan and a $200 million five-year revolver. The company plans to use the term loan proceeds to refinance its existing bank credit facilities and repurchase its 10% senior secured notes. We expect the revolver to be undrawn at closing. We are also withdrawing the ratings on Arby's. We are affirming all other ratings, including the 'B+' corporate credit rating. The outlook remains stable. Rationale The ratings on Dublin, Ohio-based fast food company The Wendy's Co. (Wendy's) reflect our view that credit metrics will remain reflective of a highly leveraged financial risk profile because of what we see as the likelihood for the company to pursue sizeable shareholder initiatives after the completion of its remodeling program, elevated debt levels, and thin cash flow protection measures. Our assessment of its business risk profile as "weak" is characterized by its participation in the highly competitive quick-service restaurant sector and its exposure to volatile commodity costs. Looking ahead for the next year, we expect benefits from its restaurant remodeling initiatives to augment earnings, and menu price increases to help mitigate the effects of commodity inflation. Key aspects of our base-case expectations are: -- We anticipate the company will continue to focus on restaurant remodeling and new unit growth, bringing capital expenditures to about $220 million in 2012. -- We see higher customer traffic for remodeled stores and existing ones to benefit from new product initiatives. This, combined with an improving U.S. economy, will lead to a 2% increase in same-store sales. -- Wendy's will continue to benefit from relatively good cash flow conversion from EBITDA, as it generates a meaningful portion of earnings from franchised operations. -- Free operating cash flows of nearly $70 million, about 50% of which Wendy's will use to reduce debt in accordance with the cash flow sweep provision under the credit agreement. Under these base case assumptions, we see modest improvement in credit protection metrics. We anticipate leverage declining to 4.7x and interest coverage improving to 3.1x by year-end 2012. Additionally, we anticipate funds from operations (FFO) to debt will increase to the mid-15% area. These credit metrics are in line with the indicative levels for the 'B+' ratings. A shift from current financial policy, such as funding shareholder initiatives with additional debt, could hinder the progress we are forecasting. Performance in 2011 was better than our expectations, on higher-than-anticipated EBITDA growth and slightly lower debt levels. Pro forma for the refinancing transaction, leverage increased to nearly 5.1x from 4.8x at year-end 2011 and FFO to debt declined slightly to 14.8% because of additional debt. Liquidity We expect Wendy's to have "adequate" liquidity over the next 12 months. Relevant assumptions and expectations of the company's liquidity profile include: -- Sources would continue to exceed uses, even if EBITDA were to decline 15%. -- We are not expecting any covenant compliance issues, as we understand the company will have about 20% cushion at inception of the new credit facilities. -- Although the refinancing will extend certain debt maturities, it has sizeable maturities coming due in 2014 that are noncall for life. Given our performance expectations, we think it could refinance this debt. Sources of liquidity include the proposed revolving credit facility, which we think will remain undrawn in the near term given our cash flow assumptions, the company's generated cash flows, and cash on hand. Uses of cash include capital expenditures. Recovery analysis For the complete recovery analysis, please see the recovery report on Wendy's, to be published as soon as possible on RatingsDirect after this report. Outlook The stable outlook reflects our opinion that credit measures should improve modestly in fiscal 2012. We think the company should benefit from its restaurant remodel initiatives, and a slight increase in menu prices should help to mitigate near-term commodity cost pressures. Our forecast for credit metrics includes EBITDA margins of slightly over 16% and leverage of about 4.7x. A downgrade could occur if Wendy's does not execute menu initiatives (including the breakfast rollout) well, competitive pressures heighten considerably, and commodity cost increases above expectations, leading to a decline in profitability. In this scenario, we would expect EBITDA margins to decline to 13% and leverage to rise to the 6x area. A lower rating could also occur if the company pursues debt-financed shareholder initiatives in a manner that harms credit quality. An upgrade is not a near-term consideration, given our financial forecast and expectations for Wendy's financial policy. Still, in the event that Wendy's adopts a financial policy that would suggest sustained leverage of about 4x and we reassess its business risk profile as "fair," we could raise the ratings one notch. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Weak Economy, Higher Food Prices Will Weaken U.S. Restaurant Sales In 2011, Jan. 25, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Key Credit Factors: Business And Financial Risks In The Restaurant Industry, Dec. 4, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Wendy's Restaurants LLC. Wendy's International Inc. The Wendy's Company Corporate Credit Rating B+/Stable/-- Wendy's International Inc. Senior Unsecured B- Recovery Rating 6 Wendy's Restaurants LLC. Senior Secured BB Recovery Rating 1 Senior Unsecured B+ Recovery Rating 3 3 Not Rated Action To From Arby's Restaurant Group Inc. Corporate Credit Rating NR/-- B+/Stable/-- Senior Secured NR BB Recovery Rating NR 1 New Rating Wendy's International Inc. Senior Secured US$200 mil bank ln due 2017 BB- Recovery Rating 2 US$1.125 bil term B bank ln due 2019 BB- Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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