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Moody's Cuts Darden Restaurants' (DRI) Senior, Unsecured Ratings to Junk

October 13, 2014 4:43 PM EDT

Moody's Investors Service today downgraded Darden Restaurants, Inc.'s (Darden)(NYSE: DRI) senior unsecured ratings to Ba1 from Baa3 and short term commercial paper rating to Not Prime from Prime-3. In addition, Moody's assigned Darden a Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default Rating (PD), and SGL-2 Speculative Grade Liquidity rating. The ratings outlook is stable. This concludes Moody's review that was initiated on December 19, 2013.

RATINGS RATIONALE

"The downgrade reflects Moody's view that executing a sustained and profitable turnaround at Olive Garden in the intermediate term and adoption of a more moderate financial policy is not likely due to persistently soft consumer spending and unprecedented changes in Darden's leadership." Stated Bill Fahy, Moody's Senior Credit Officer. Moody's expects earnings will remain under pressure as consumer spending on discretionary items such as eating out remains soft, whereas the wholesale change in Darden's leadership at a time of significant operating challenges adds risk to an already difficult turnaround of Olive Garden. "Overall, Moody's believes Darden will not be able to generate the level of earnings and credit metrics that are representative of a Baa3 rated company on a sustained basis while the potential for additional asset sales or brand divestitures that could further impair the company's credit profile remain a concern." stated Fahy

The downgrade follows the recent announcement that Darden's shareholders replaced the company's entire board of directors, of which all newly elected board members were nominated by activist shareholder, Starboard Capital. The company is also actively searching for a new chief executive officer.

Ratings downgraded are;

- $400 million ($122m outstanding) 4.5% senior unsecured notes due 10/15/2021 lowered to Ba1 (LGD4) from Baa3

- $500 million 6.2% senior unsecured notes due 10/15/2017 lowered to Ba1 (LGD4) from Baa3

- $450 million ($118m outstanding) 3.35% senior unsecured notes due 11/1/2022 lowered to Ba1 (LGD4) from Baa3

- $300 million 6.8% senior unsecured notes due 10/15/2037 lowered to Ba1 (LGD4) from Baa3

- $150 million 6.0% senior unsecured notes due 8/15/2035 lowered to Ba1 (LGD4) from Baa3

- Senior unsecured shelf and medium term notes program rating lowered to (P)Ba1 from (P)Baa3

- Senior unsecured shelf rating lowered to (P)Ba1 from (P)Baa3

- Short term commercial paper program rating lowered to Not Prime from Prime-3

Ratings assigned are:

Corporate Family Rating of Ba1

Probability of Default rating of Ba1-PD

Speculative Grade Liquidity rating of SGL-2

The Ba1 Corporate Family Ratings (CFR) reflects the scale of Darden's restaurants that are well known and relatively well distributed throughout the U.S. which help limit its exposure to regional economic weakness. Also supporting the ratings is Darden's brand diversity with two key full service dining out categories and five specialty restaurant brands that help mitigate the risk associated with changing consumer tastes. Moody's also expects Darden's liquidity to remain good. The ratings also reflect Darden's persistently weak same store sales performance and earnings concentration of its core brand -- Olive Garden -- and the concern that executing a sustained turnaround of this trend over the intermediate term will be challenging. Moody's views persistently soft consumer spending, high level of promotions and discounting by competitors and leadership changes as key impediments to a turnaround at Olive Garden over the intermediate term. The ratings also incorporate our view that managements financial policy towards shareholders will remain very aggressive.

The stable outlook reflects our expectation that Darden's operating metrics should begin to stabilize over the overtime as management continues to focus on strengthening Olive Garden and sustaining operating performance at LongHorn and the specialty restaurant group. The outlook also expects that liquidity will remain good.

Given the recent downgrade a higher rating over the intermediate term is unlikely. Factors that could result in upward ratings pressure include a sustained improvement in operating performance and same store sales -- particularly traffic -- across all concepts as well as new management developing a track record of managing the balance sheet prudently. Quantitatively, a higher rating would require leverage on a debt to EBITDA basis migrating towards 3.0 times, EBITA coverage of interest of over 4.0 times and retained cash flow to debt of around 25%.

Factors that could result in a downgrade include continued deterioration in same store sales -- particularly at Olive Garden , and if debt levels increase to support returns to shareholder without a commensurate improvement in earnings. A downgrade would likely occur if leverage approaches 4.0, EBITA to interest to drop towards 3.0 times or if there were no improvement in retained cash flow to debt on a sustained basis.



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