Fitch: No Rating Implications from Brinker's Acquisition of Franchisee

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings does not expect any rating implications from Brinker International, Inc.'s (Brinker; NYSE: EAT) acquisition of Chili's franchisee - Pepper Dining Holding Corp. (Pepper Dining). Brinker's long-term Issuer Default Rating (IDR) is 'BBB-'. The Rating Outlook is Stable. See the full list of ratings at the end of this press release.

Prior to being acquired by Brinker, Pepper Dining was owned by Olympus Partners and operated 103 Chili's restaurants in the Northeast and Southeast U.S. The purchase price of $106.5 million was debt funded with Brinker's $750 million credit facility which had availability of $404.3 million at March 25, 2015. Brinker did not disclose the EBITDA generated by these restaurants but expects the acquisition to be accretive to earnings in fiscal 2016.

Fitch expects the transaction to have a negligible impact on Brinker's leverage. For the latest 12-month (LTM) period ended March 25, 2015, total adjusted debt-to-operating EBITDAR (rent-adjusted leverage) was 3.1x. Fitch continues to project that rent-adjusted leverage will approximate 3.3x for the fiscal year ended June 2016.

Fitch does not believe the transaction signals trouble within the Chili's system as the brand has done a good job maintaining consumer relevance and market share. At March 25, 2015, 55% of Brinker's 1,629 units were company-owned and 45% were franchised with six franchisees operating approximately 80% of Chili's domestic franchise units. Fitch estimates that Brinker's mix of company-owned to franchised restaurants will be about 60%/40% as a result the Pepper Dining acquisition.

Brinker's ratings reflect above-average sales trends at Chili's along with the company's relatively stable leverage and good free cash flow (FCF - defined as cash flow from operations less capex and dividends). Chili's domestic comparable restaurant sales increased 2.9% for the 39-week period ended March 25, 2015. Chili's company-owned restaurants reported a 2.8% increase due to 1% price, 1.1% mix, and 0.7% traffic growth. Rent-adjusted leverage has remained in the low 3.0x range since 2010 while LTM FCF was $134 million, slightly higher than Fitch's projection of approximately $125 million in fiscal 2015.

Ratings consider Brinker's modestly aggressive stance towards share repurchases as buybacks have been funded with a combination of FCF and incremental debt. However, Fitch would expect Brinker to be more conservative with share repurchases if operating trends weaken given the company's commitment to maintaining investment-grade credit statistics.

RATING SENSITIVITIES:

Future developments that may, individually or collectively, lead to a positive rating action include:

--Total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rent-to-operating EBITDA plus gross rent) maintained below 3x;

--Comparable restaurant sales at Chili's that are consistently positive and above those of peers, due to increased traffic;

--Increased U.S. casual dining market share at Chili's;

--Significantly higher than expected operating income growth and margin expansion;

Future developments that may, individually or collectively, lead to a negative rating action include:

--Total adjusted debt-to-operating EBITDAR sustained above 3.5x;

--Persistently negative comparable restaurant sales at Chili's, due to declining traffic and market share and margin declines;

--Meaningfully lower than expected FCF due to lower operating income, higher capital expenditures, and/or a more aggressive dividend policy;

--Debt-financed share repurchases concurrent with weakening operating trends.

Fitch currently rates Brinker as follows:

--Long-term Issuer Default Rating (IDR) 'BBB-';

--Bank credit facility 'BBB-';

--Senior unsecured notes 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150625006384/en/

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
or
Media Relations
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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