Brinker International (EAT) Downgraded to 'BB+' by S&P; Outlook is Stable
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S&P Global Ratings lowered its corporate credit rating on Brinker International Inc. (NYSE: EAT) to 'BB+' from 'BBB-'. At the same time, we lowered the issue-level ratings on the company's senior unsecured debt to 'BB+' from 'BBB-' and assigned a '3' recovery rating, reflecting our expectation of meaningful recovery in the event of a default at the low end of the 50% to 70% range. We removed the ratings from CreditWatch with negative implications, where we placed them in August 2016. The outlook is stable.
We also assigned a 'BB+' issue level rating the company's proposed $350 million senior unsecured notes. The recovery rating is '3', indicating our expectation for meaningful recovery in the event of default, at the lower end of the 50% to 70% range.
"The downgrade primarily reflects our expectation of the company's higher leverage (with adjusted debt to EBITDA above 3x) on a sustained basis, following the completion of the proposed note offering," said credit analyst Helena Song. "This is a meaningful shift from the company's previous financial policy (with adjusted debt to EBITDA below 3x) and as a result, we reassessed the company's financial risk profile as significant."
The stable outlook on Brinker reflects our expectation of generally stable operating performance as the company implements additional operating initiatives to drive traffic and protect margins, following modestly weakened performance in recent quarters. We also believe Brinker will maintain leverage in the low- to mid-3x area, following the completion of the proposed debt issuance.
We could consider a downgrade if Brinker further increases leverage meaningfully to repurchase shares, or if operating underperformance causes credit metrics to weaken such that leverage is sustained in the high-3x area or above. Leverage could rise to 3.7x if, for example, Brinker's gross margin deteriorates by about 250 basis points (bps) in fiscal 2017 while revenues remain in line with our base-case expectation.
Although unlikely in the near term given the company's financial policy, we could raise the ratings if Brinker retains its market position and elects to improve credit metrics, resulting in total debt to adjusted EBITDA in the high 2x range or better on a sustained basis, and the trend is supported by the company's financial policy. This would occur if the company reduces debt by about $500 million.
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