TEXT-S&P rates Ruby Tuesday's notes 'B-'

Thu Jul 19, 2012 2:54pm EDT

Overview
     -- U.S. casual-dining restaurant chain operator Ruby Tuesday has 
completed a refinancing transaction, adding a new $250 million senior note to 
repay existing debt.
     -- Concurrently, the company amended its existing revolver, reducing 
total commitments to $200 million from $380 million. 
     -- After receiving final documents and reviewing the terms, we are 
assigning our 'B' corporate credit rating to Ruby Tuesday and our 'B-' 
issue-level rating and '5' recovery rating to its $250 million senior notes. 
     -- The stable outlook reflects our belief that credit protection metrics 
will remain in line with expectations despite operational erosion that could 
result in weakening credit measures over the intermediate term.

Rating Action
On July 19, 2012, Standard & Poor's Ratings Services assigned its 'B' 
corporate credit rating to Maryville, Tenn.-based Ruby Tuesday Inc. The 
outlook is stable.

At the same time, we assigned a 'B-' issue-level rating with a '5' recovery 
rating to the company's $250 million senior unsecured notes. The '5' recovery 
rating indicates our expectation for modest (10% to 30%) recovery of principal 
in the event of a payment default.

Ruby Tuesday used the proceeds from the notes mainly to repay $155 million in 
existing revolver borrowings, about $45 million in existing senior notes, and 
nearly $20 million in mortgage-related debt. The company could use the 
proceeds in the future to fund share repurchases and other acquisitions. 

Rationale
The rating on Ruby Tuesday reflects Standard & Poor's expectation that credit 
metrics will continue to weaken in the near term. While the transaction added 
only modest leverage, we expect operating performance will decline in the 
coming year because of continued top-line erosion and increased costs 
associated with the company adjusting its strategy to reposition itself in the 
saturated bar-and-grill category within the restaurant industry. 

We view Ruby Tuesday's financial risk profile as "highly leveraged" because 
the refinancing adds debt at a time when the company is seeking to restore 
consistently positive sales through menu and pricing changes. Ruby Tuesday is 
increasing leverage from 4.4x in the third quarter ended Feb. 28, 2012 to 4.6x 
pro forma for the deal. Pro forma debt includes the $250 million notes and 
nearly $90 million in mortgage-related liabilities largely acquired as part of 
the company's franchise partnership acquisitions in fiscal 2011. Interest 
coverage will decline to an estimated 2.7x from 3.4x before the transaction. 

Below is our financial ratio forecast for fiscal year-end 2013 (May 2013):
     -- We expect Ruby Tuesday's leverage will reach 5.8x due to a decline in 
EBITDA.
     -- We believe EBITDA interest coverage will decline to 2.2x because of 
performance erosion and higher costs associated with the re-financing.
     -- We forecast funds from operations (FFO) to debt will decline to 13.2% 
in 2013 from the low-20% range before the deal as a result of operational 
weakness and added leverage. 

The outlook for the casual-dining sector remains negative due to oversupply, 
lack of differentiation, and declining traffic. The sector is highly 
competitive with respect to prices and service and has seen increased media 
spending to support new promotions in recent years. We view Ruby Tuesday's 
business risk profile as "vulnerable," reflecting its lack of brand diversity 
to date and weak market position relative to peers, which have seen stronger 
turnarounds recently because of their promotional efforts. We forecast Ruby 
Tuesday could continue to lose market share in the near term to larger peers 
including Darden Restaurants Inc. and Brinker International Inc., which both 
posted positive same-store sales in the latest quarter, while Ruby Tuesday 
delivered negative results.

We expect a 10% EBITDA decline for the fiscal year ending May 2013, as 
continued closures of Ruby Tuesday restaurants offset incremental sales from 
new concepts. We also expect the company's EBITDA margin will decline 70 basis 
points (bps) to 6.5% in 2013 as increased marketing and other spending to 
support its repositioning offset procurement and other cost savings. We 
believe future growth will be limited for Ruby Tuesday, stemming from 
converting less profitable existing restaurants into new concepts, including 
seafood restaurant Marlin and Ray's.

Standard & Poor's economists currently forecast a 20% likelihood of a U.S. 
recession, with GDP growing 1.9% in the second half of 2012 and 2.1% in 2013, 
unemployment continuing to remain at or above 8%, and consumer spending 
growing 2.2% in 2012 and 2.4% in 2013. Considering these economic assumptions, 
our forecast for Ruby Tuesday's operating performance for fiscal 2013 includes 
the following:
     -- We expect overall sales will be flat as the company closes existing 
Ruby Tuesday restaurants or converts them into new concepts including Marlin & 
Ray's, for a net 4% decline in total restaurant count.
     -- We believe gross margin will decrease 20 bps due to elevated commodity 
costs and increased promotions.
     -- We anticipate total selling, general & administrative (SG&A) expenses 
will increase in the low-single-digit percent rate due to incremental TV and 
other advertising costs. 
     -- We project modest franchise buy backs of 15 to 20 restaurants in the 
U.S.
     -- We forecast a 31% EBITDA decline in fiscal 2012 and 10% decline in 
2013 as continued closures of Ruby Tuesday restaurants outweigh modest new 
profit from new and converted stores.

Ruby Tuesday cut capital spending and labor costs amid the economic downturn, 
eventually closing underperforming restaurants to improve profitability. 
Despite weak top-line results, the company generated strong free cash flow of 
more than $120 million in 2010 due to reduced spending and one-time items. 
Fiscal 2011 was the first year of positive top-line results since 2007 but 
free cash flow declined to $90 million due to higher costs associated with 
acquiring franchise partnerships and renovating existing Ruby Tuesday 
restaurants. 

We project free cash flow will continue to decline in fiscal 2013 and are 
forecasting a 60% decrease to about $37 million due to increased capital 
spending and lower earnings. In particular, we believe operating leverage will 
continue to worsen as Ruby Tuesday absorbs costs associated with its franchise 
partnerships and increases marketing spending.

We expect Ruby Tuesday will generate between $25 million and $50 million from 
continued sale leasebacks in the coming year and could spend as much as $20 
million on share repurchases annually if cash flow improves. We project the 
company will also continue to generate lower average unit volumes than some 
peers as it converts its Ruby Tuesday restaurants into new concepts. 

Liquidity
We view Ruby Tuesday's liquidity as "adequate," as we expect its sources of 
liquidity to be greater than its uses over the next 12 to 18 months. The 
amended revolver included in this transaction provides more flexible 
covenants, which will provide a cushion for projected weak near-term 
performance. 

Our assessment of the company's liquidity profile includes the following 
factors and assumptions:
     -- We forecast cash sources will exceed cash uses by more than 1.2x over 
the next 12 months and remain positive over the next 24 months.
     -- We forecast net sources would remain positive even if EBITDA were to 
decline 15%.
     -- We expect the company will continue to borrow under the revolver in 
the near term to fund capital expenditures and other costs associated with 
restaurant conversions. 
     -- Debt maturities are favorable, with the revolving credit facility due 
in 2015 and senior notes due in 2020.

Recovery analysis
For the complete recovery analysis, see the recovery report on Ruby Tuesday, 
to be published as soon as possible on RatingsDirect.

Outlook
The stable rating outlook reflects our expectation that operational 
deterioration, coupled with limited debt reduction, will result in worse 
credit measures over the intermediate term. We could lower the rating if debt 
leverage approaches 7x and FFO to total debt declined below 10%. This could 
occur if gross margin falls 150 bps and EBITDA declines about 25% from our 
expectations for fiscal 2013. It could also occur if SG&A grows at a 
mid-single-digit percent rate compared to the current low-single-digit rate we 
are forecasting. Given Ruby Tuesday's expected credit measures, our industry 
outlook and continued restaurant closures and conversions, we are not 
expecting to raise our ratings over the near term.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009 
     -- Key Credit Factors: Business And Financial Risks In The Restaurant 
Industry, Dec. 4, 2008

Ratings List

New Ratings

Ruby Tuesday Inc.
 Corporate Credit Rating                B/Stable/--        
 Senior Unsecured
  US$250 mil 7.625% sr nts due 2020     B- 
   Recovery Rating                      5                  


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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