Moody's Lifts Outlook on Carrols Restaurant Group (TAST) to Positive; Ratings Affirmed

Moody's Investors Service changed the ratings outlook for Carrols Restaurant Group, Inc. (Nasdaq: TAST) ("Carrols") to positive from stable. In addition, Moody's affirmed Carrol's B3 Corporate Family Rating (CFR), B3-PD Probability of Default Rating and the B3 rating for its $200 million second lien senior secured notes. Carrol's SGL-3 Speculative Grade Liquidity Rating was affirmed.

The change in outlook to positive from stable reflects Carrol's material improvement in operating performance over the past three quarters, as a steady pipeline of well accepted new product offerings and remodeled restaurants have driven positive same store sales, traffic and average check. These positive trends along with a material decline in commodities prices -- particularly beef -- generated improved earnings and credit metrics with leverage on a debt to EBITDA basis of about 4.7 times and EBIT to interest coverage of approximately 1.3 times for the LTM period ending December 31, 2015.

Ratings affirmed:

-- Corporate Family Rating (CFR) at B3

-- Probability of Default Rating (PDR) at B3-PD

-- $200 million second lien notes at B3 (LGD4)

-- Speculative Grade Liquidity Rating rated SGL-3

The rating outlook is positive

RATINGS RATIONALE

Carrols' B3 CFR reflects the company's modest interest coverage and consistent negative free cash flow as well as its single brand focus, modest scale, geographic concentration and integration risks of an acquisition driven growth strategy. The ratings are supported by Carrols' position as the largest franchisee in the Burger King system in terms of units, the significant ownership (approximately 21%) and Board representation by Burger King Corporation ("BKC"), the brand's strong position among its peers, and well balanced day-part division.

The positive ratings outlook reflects Moody's view that both BKC's strategic initiatives and Carrols' experience in operating and integrating Burger King restaurants should result in a steady improvement in earnings and credit metrics over the next 12-18 months. The outlook also reflects Moody's view that revenue and earnings from recent acquisitions and sales lift from ongoing unit remodeling should provide additional improvement to earnings and liquidity over time.

Factors that could result in an upgrade include sustained improvement in credit metrics and free cash flow driven in part by sustainable positive same store sales trends - particularly traffic, and improved unit-level economics at acquired units. A higher rating would require debt to EBITDA of below 5.0x and EBIT coverage of gross interest migrating towards 1.75 times on a sustained basis. A higher rating would also require generating positive free cash flow on a consistent basis while maintaining at least adequate liquidity.

Factors that could result in a downgrade include any deterioration in operating performance, particularly a sustained deterioration in traffic or integration issues with acquired restaurants. Specifically, a downgrade could occur if EBIT coverage of cash interest expense fell below 1.0x or debt/EBITDA increased above 6.0x on a sustained basis. In addition, any deterioration in liquidity for any reason could lead to a downgrade.

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