Fitch Assigns Initial 'BBB-' IDR to Brinker; Rates $550MM Proposed Notes 'BBB-'; Outlook Stable

Wed May 8, 2013 10:46am EDT

(The following statement was released by the rating agency) CHICAGO, May 08 (Fitch) Fitch Ratings has assigned the following initial ratings to Brinker International, Inc. (Brinker; NYSE: EAT): --Long-term Issuer Default rating (IDR) 'BBB-'; --Bank Credit facility 'BBB-'; --Senior Unsecured Notes 'BBB-'. The Rating Outlook is Stable. Fitch has simultaneously assigned a 'BBB-' rating to Brinker's proposed $550 million issuance of notes in five-year and 10-year tranches. Proceeds will be used to refinance the firm's existing $290 million of 5.75% notes due June 2014, to repay a portion of its outstanding revolver balance, and for general corporate purposes which may include share repurchases. The proposed notes rank equally with Brinker's existing debt. Terms include a Change of Control Offer Triggering Event provision and other customary covenants. At March 27, 2013, Brinker had approximately $705 million of total debt. Key Rating Drivers: The ratings reflect Brinker's moderate leverage, improved same-store sales (SSS) performance, operating income growth, and expanding margins. Brinker's commitment to maintaining credit statistics appropriate for an investment grade rating and the top-three market position of Chili's Bar & Grill (Chili's) complement its credit profile. At March 27, 2013, 97% of the firm's 1,588 system-wide restaurants were Chili's. The remaining 3% were Maggiano's Little Italy. Approximately 54% of the firm's system-wide units were company-operated and 46% were franchised, while 17% were in international markets. Ratings incorporate Brinker's moderately aggressive financial strategy, the intensely competitive U.S. restaurant environment, and recent weakness in industry traffic. Brinker's priorities for cash flow usage include investing in its business and returning cash to shareholders. Brinker has a 40% dividend payout target and plans to repurchase $1 billion of common stock over the next five years. A combination of free cash flow (FCF) and incremental debt could be used to fund share repurchases. However, as previously mentioned, Fitch expects Brinker to manage its capital structure such that credit measures remain appropriate for the current rating. Credit Metrics: For the LTM period ended March 27, 2013, total debt-to-operating EBITDA was 1.8x and rent-adjusted leverage or total adjusted debt-to-operating EBITDAR was 3.0x. Fitch defines rent-adjusted leverage as total debt plus 8x gross rent divided by operating EBITDA plus gross rent. Brinker's rent-adjusted leverage has declined from 3.5x in 2008 due to a combination of debt reduction in 2009 and 2010 and double-digit operating income growth since 2010. Operating EBITDAR-to-gross interest plus rents was 4.3x and funds from operations (FFO) fixed-charge coverage was 3.1x. LTM FCF (defined as cash flow from operations less capital expenditures and dividends) was slightly under $100 million versus an average of about $140 million annually since 2009, as CAPEX is elevated due to remodeling. Brinker plans to spend $130 million to $140 million on CAPEX in fiscal 2013. Pro forma for the debt issuance discussed above but excluding any revolver pay-down, rent-adjusted leverage is 3.6x. Fitch expects total adjusted debt-to-operating EBITDAR to be in the low 3.0x range at the end of fiscal 2013 and fiscal 2014. Moreover, Fitch anticipates that Brinker will generate FCF in excess of $100 million annually. Same-Store Sales and Margins: SSS for Brinker's company restaurants have been positive for eight of the last nine quarters as a result of the increased focus on value, more menu variety, enhanced service, and reimaging. Chili's has shifted away from limited-time offers towards a permanent value-based menu, added pizza and flatbreads to its menu, and has improved customer satisfaction. Fitch believes the efforts around menu and service have improved Brinker's competitiveness and should help sustain SSS growth in the near term. Chili's restaurant operating margin (excluding depreciation and amortization expense) has expanded by 270 basis points (bps) since fiscal 2010 to 17.1% in fiscal 2012. The firm has managed through the volatile commodity food cost environment and has improved the efficiency of its restaurants with new kitchen technology and better labor management. Brinker's EBITDA margin expanded 200 bps over the 2010-2012 period to 13.2% at the end of fiscal 2012 as a result of improved restaurant level profitability and good general and administrative cost control. Brinker is on track to achieve its goal of increasing operating margin by 400 bps to over 10% by fiscal 2014. Liquidity, Maturities, and Covenants: Brinker's liquidity is supported by its FCF generation and $250 million revolver expiring Aug. 9, 2016. At March 27, 2013, the firm had $86 million of cash and $100 million of revolver availability. Significant upcoming maturities are limited to the $290 million of 5.75% notes due June 2014. Brinker's credit facility includes a Minimum Adjusted Coverage Ratio test of 1.5x and a Maximum Debt-to-Cash Flow limitation of 3.5x. The firm has ample cushion under these covenants. Fitch estimates that these ratios were 2.8x and 2.7x, respectively, at March 27, 2013. Ratings Sensitivities: An upgrade to Brinker's ratings would be recommended if rent-adjusted leverage was consistently below 3.0x and the firm's FCF margin-to-sales remained in excess of 4%. Positive SSS performance and stable or continued margin improvement would also be required for positive rating actions. Conversely, rent-adjusted leverage sustained above 3.5x due to SSS declines and margin contraction or increased debt levels could result in a downgrade to Brinker's ratings. Debt-financed share repurchases concurrent with weak operating performance could also trigger a negative rating action. Contact: Primary Analyst Carla Norfleet Taylor, CFA Director +1-312-368-3195 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Wesley E. Moultrie II, CPA Managing Director +1-312-368-3186 Committee Chairperson Mark A. Oline Managing Director +1-312-368-2073 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'2013 Outlook: U.S. Restaurants - Intensifying Competition, Food Inflation, and Legislation to Drive Operating and Financial Strategies' (Dec. 19, 2012). Applicable Criteria and Related Research Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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