RPT-US CREDIT-Darden credit spreads seen wider on profit warning

By Anastasija Johnson

NEW YORK, Aug 27 (Reuters) - Credit spreads on Darden
Restaurants Inc (DRI.N) jumped after a profit warning and are
likely to trend even wider as Americans change their dining-out
habits due to the weak economy.

A possible increase in share buybacks may also weigh on its
credit profile.

The company, which operates Red Lobster, Olive Garden, and
LongHorn Steakhouse casual dining chains, on Tuesday warned
investors that its quarterly profit will come well below Wall
Street estimates as traffic in its restaurants declined.

The Orlando, Florida-based company is broadly viewed as one
of the top performers in the casual dining group but the
announcement showed that even it was not immune to
deteriorating economic conditions.

"We expect further downward revisions as the year
progresses and casual dining continues to feel the pain of
reduced discretionary spending," Gimme Credit analyst Carol
Levenson said in a report.

Darden cut its forecast for the full year and said it now
expects its combined same-restaurant sales to be flat or up
just 1.0 percent, not up 2.0 percent as it forecast two months
ago, because higher oil prices and a weak economy are leaving
Americans with fewer dollars to spend on casual dining.

Poor earnings visibility in the current economic
environment means company management is likely to focus more on
propping up share value rather than reducing debt. The
company's debt rose last year after it acquired Rare
Hospitality International, analysts said.

The stock was down almost 13 percent on the profit warning
on Wednesdasy, "increasing shareholder enhancement pressure,"
according to Levenson.

Fitch Ratings on Wednesday affirmed Darden's "BBB" rating
but changed its outlook to negative, citing expected
deterioration of credit ratios due to lower than anticipated
cash flow generation and the lack of debt reduction.

"Due to aggressive unit expansion and the potential for
heightened share repurchases, debt reduction is likely to be
less of a priority for Darden," Fitch said.

"If combined same restaurant sales growth remains negative
in the near-term, the company becomes more aggressive with
share repurchases and credit statistics weaken more than
anticipated, Darden's ratings could be downgraded," Fitch
said.

Moody's already rates the restaurant operator one notch
lower at "Baa3," just above junk grade.

The cost to insure Darden's debt against a default with
credit default swaps jumped 10 percent on Tuesday and continued
to rise on Wednesday to 200 basis points, or $200,000 a year to
insure $10 million for five years, according to Markit
Intraday.

Barclays analysts on Wednesday recommended investors buy
protection on Darden and sell protection on Yum! Brands Inc
(YUM.N), which is expected to outperform because of its global
position and lower-priced chains, including KFC, Taco Bell and
Pizza Hut.

"We feel the elevated food and gas prices, high
unemployment rate, and depressed home prices will continue to
hurt the US consumer through end-calendar year 2008," Barclays
analysts said in a report. "As such, we feel the consumer will
continue to rein back on discretionary dining expenses or trade
down to more affordable alternatives."

(Reporting by Anastasija Johnson)