NEW YORK Weakened credit profiles and the sustained U.S. recession continue to make access to capital difficult and more expensive for restaurant companies, a new report from Fitch Ratings said.
Those companies with maturing credit facilities or those with high levels of debt are most susceptible to challenging refinancings, defaults or possible bankruptcies.
“With the exception of McDonald’s Corp., which has the strongest operating and financial fundamentals of the industry, the combination of a challenging operating environment and difficult credit conditions will raise borrowing costs for most restaurant companies,” said the latest Fitch Ratings U.S. Restaurants and Foodservice report. “Given that efforts to stimulate the economy will take time to materialize, Fitch does not anticipate a sustainable turnaround for the restaurant industry in 2009.”
Most recently, restaurant companies including Ruby Tuesday, Brinker International, Landry’s Restaurants, Ruth’s Chris Hospitality and Wendy’s/Arby’s Group have undertaken debt and credit restructurings. While they each were able to amend credit facilities, the cost of capital increased and the agreements between lender and borrower became more restrictive. At Wendy’s/Arby’s for example, pricing on the facility rose to LIBOR plus 4 percent, from LIBOR plus 2.25 percent. LIBOR is the London Interbank Offered Rate, a benchmark interest rate that banks provide to each other.
OSI Restaurant Partners and DineEquity each have large amounts of debt -- about $1.8 billion and $1.9 billion, respectively -- stemming from leveraged buyouts in recent years, but the companies do not have near-term maturities that would force liquidity issues, Fitch’s report said. Still, weakened operating fundamentals that include negative same-store sales at each company make debt reduction difficult.
“Preserving liquidity and maintaining strong bank relationships is paramount in this environment and will be the focus of most management teams,” said Wesley E. Moultrie, II, senior director at Fitch Ratings.
Strategies to conserve cash will include the halting or reduction of stock dividends, slowing of new unit development and slashing of general and administrative costs, mainly through personnel layoffs or salary reductions.
In addition, refranchising activities will continue this year, Fitch said, as companies look to sell corporate restaurants that require capital outlays. While refranchising is a long-term strategy for companies like McDonald’s and Yum! Brands, others, like DineEquity, are relying on refranchising revenues to help support cash flow. That could be problematic, Fitch said.
“Transaction sizes are smaller and deals are taking longer to consummate due to increased lender due diligence and higher capital requirements from buyers,” the report noted.
Contact Sarah E. Lockyer at [email protected].