Ranking Motion: Moody’s assigns first time rankings to Zaxbys’; CFR at B3
World Credit score Analysis – 04 Dec 2020
New York, December 04, 2020 — Moody’s Buyers Service, (“Moody’s”) as we speak assigned first time rankings Zaxby’s Working Firm LP (“Zaxby’s”) together with a B3 company household ranking and a B3-PD chance of default ranking. As well as, Moody’s assigned a B2 ranking to Zaxbys’ proposed $100 million 1st lien revolving credit score facility and $625 million 1st lien senior secured time period mortgage in addition to a Caa2 ranking to the corporate’s proposed $250 million 2nd lien senior secured time period mortgage. The outlook is steady.
Proceeds from the proposed senior secured financial institution services and customary fairness contributed by funds affiliated with Goldman Sachs Service provider Banking Division shall be used to fund the leveraged buyout of Zaxbys. Moody’s rankings and outlook are topic to receipt and evaluate of ultimate documentation.
“The rankings mirror governance issues notably aggressive monetary methods given Zaxbys excessive leverage professional forma for its acquistion with leverage of over 7.0 instances for the LTM interval ending September 30, 2020, in addition to its comparatively small scale, extra slim product focus and geographic focus” acknowledged Invoice Fahy, Moody’s Senior Credit score Officer. “Nevertheless, the rankings additionally mirror Zaxbys sturdy model consciousness in its core markets, enterprise mannequin that supported its capacity to rapidly shift to thoroughly off-premise eating, good day-part and weekly distribution, materials fairness part to partially finance the acquisition and good liquidity.” acknowledged Fahy. The rankings additionally mirror the influence of the coronavirus pandemic, which Moody’s views as a social threat.
Assignments:
..Issuer: Zaxby’s Working Firm LP
…. Likelihood of Default Ranking, Assigned B3-PD
…. Company Household Ranking, Assigned B3
….Senior Secured 1st Lien Financial institution Credit score Facility, Assigned B2 (LGD3)
….Senior Secured 2nd Lien Financial institution Credit score Facility, Assigned Caa2 (LGD5)
Outlook Actions:
..Issuer: Zaxby’s Working Firm LP
….Outlook, Assigned Secure
RATINGS RATIONALE
Zaxbys’ ranking is constrained by its excessive leverage, comparatively small scale, extra slim product focus and geographic focus. The ranking advantages from a robust model consciousness in its core markets, enterprise mannequin that supported its capacity to rapidly shift to thoroughly off-premise eating, good day-part and weekly distribution, a fabric quantity of contributed fairness and good liquidity.
The steady outlook displays Moody’s view that leverage will steadily enhance as numerous prices saving and operational initiatives are applied and acquire traction, new eating places are added and administration focuses on debt discount over and above necessary amortization. The outlook additionally incorporates Moody’s view that Zaxby’s will preserve good liquidity and new restaurant additions shall be at a measured tempo.
The corona-virus outbreak, the federal government measures put in place to include it, and the weak international financial outlook proceed to disrupt economies and credit score markets throughout sectors and areas. Moody’s evaluation has thought-about the impact on the efficiency of the restaurant sector from the present weak U.S. financial exercise and a gradual restoration for the approaching months. Though an financial restoration is underway, it’s tenuous and its continuation shall be carefully tied to containment of the virus. Consequently, the diploma of uncertainty round our forecasts is unusually excessive. Moody’s regards the corona-virus outbreak as a social threat underneath our ESG framework, given the substantial implications for public well being and security.”
Zaxbys personal possession is a ranking issue given the potential implications from each a capital construction and working perspective. Monetary insurance policies are at all times a key concern of privately-owned firms close to the potential for greater leverage, extractions of money stream through dividends, or extra aggressive development methods.
Eating places are deeply entwined with sustainability, social and environmental considerations given their working mannequin close to sourcing meals and packaging, in addition to having an in depth labor power and fixed client interplay. Whereas these could circuitously influence the credit score, these elements might influence model picture and lead to a extra optimistic view of the model general.
The credit score services are anticipated to include covenant flexibility for transactions that might adversely have an effect on collectors, together with: incremental facility capability as much as the larger of $125 million and 100% of professional forma consolidated EBITDA, plus reallocated common debt basket quantities (with the foregoing quantities permitted to be incurred with an earlier maturity date than the prevailing loans), plus an extra quantity topic to both professional forma First Lien Leverage Ratio = 5.0x (if secured on a primary lien foundation) or professional forma Senior Secured Leverage Ratio = 7.0x (if secured on a second lien foundation), or as long as leverage doesn’t enhance on a professional forma foundation if used to finance a permitted acquisition or funding; the power to switch belongings to unrestricted subsidiaries topic to a blocker provision limiting the switch of mental property which is materials (taken as a complete); the requirement that solely wholly-owned subsidiaries act as subsidiary guarantors, elevating the chance that ensures could also be launched following a partial change in possession; and step downs within the asset sale prepayment requirement to 50% and 0% if the First Lien Leverage Ratio is the same as or lower than 4.5x and 4.0x, respectively and excluding the proceeds of any permitted Sale-Leaseback Transaction.
The B2 ranking assigned to the $100 million 1st lien revolving credit score facility and $625 million first lien time period mortgage displays the help from the numerous quantity of junior rating debt and non-debt liabilities to those services, together with the second lien time period mortgage. The Caa2 ranking on the $250 million 2nd lien senior secured time period mortgage displays its junior place to the numerous quantity of 1st lien senior secured financial institution debt.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Components that might lead to an improve embody a sustained strengthening of debt safety metrics pushed partly by a stable enchancment in identical retailer gross sales and earnings. Particularly, a better ranking would require debt to EBITDA of roughly 5.75 instances and EBIT protection of gross curiosity of over 1.75 instances. An improve would additionally require good liquidity.
A downgrade might happen if on a sustained foundation debt to EBITDA was over 6.75 instances or EBIT to curiosity protection was under 1.25 instances. A deterioration in liquidity might additionally lead to a downgrade.
Zaxbys, with headquarters in Georgia, operates about 146 and franchises round 760 eating places in 17 states underneath the Zaxbys model title. Annual revenues are about $410 million, though systemwide gross sales are about $2.0 billion. The corporate shall be majority owned by Goldman Sachs Service provider Banking.
The principal methodology utilized in these rankings was Restaurant Business printed in January 2018 and out there at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108012. Alternatively, please see the Ranking Methodologies web page on www.moodys.com for a replica of this system.
REGULATORY DISCLOSURES
For additional specification of Moody’s key ranking assumptions and sensitivity evaluation, see the sections Methodology Assumptions and Sensitivity to Assumptions within the disclosure kind. Moody’s Ranking Symbols and Definitions will be discovered at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For rankings issued on a program, sequence, class/class of debt or safety this announcement offers sure regulatory disclosures in relation to every ranking of a subsequently issued bond or word of the identical sequence, class/class of debt, safety or pursuant to a program for which the rankings are derived completely from current rankings in accordance with Moody’s ranking practices. For rankings issued on a help supplier, this announcement offers sure regulatory disclosures in relation to the credit standing motion on the help supplier and in relation to every specific credit standing motion for securities that derive their credit score rankings from the help supplier’s credit standing. For provisional rankings, this announcement offers sure regulatory disclosures in relation to the provisional ranking assigned, and in relation to a definitive ranking which may be assigned subsequent to the ultimate issuance of the debt, in every case the place the transaction construction and phrases haven’t modified previous to the task of the definitive ranking in a way that might have affected the ranking. For additional data please see the rankings tab on the issuer/entity web page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit score help from the first entity(ies) of this credit standing motion, and whose rankings could change because of this credit standing motion, the related regulatory disclosures shall be these of the guarantor entity. Exceptions to this strategy exist for the next disclosures, if relevant to jurisdiction: Ancillary Providers, Disclosure to rated entity, Disclosure from rated entity.
The rankings have been disclosed to the rated entity or its designated agent(s) and issued with no modification ensuing from that disclosure.
These rankings are solicited. Please confer with Moody’s Coverage for Designating and Assigning Unsolicited Credit score Scores out there on its web site www.moodys.com.
Regulatory disclosures contained on this press launch apply to the credit standing and, if relevant, the associated ranking outlook or ranking evaluate.
Moody’s common rules for assessing environmental, social and governance (ESG) dangers in our credit score evaluation will be discovered at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
A minimum of one ESG consideration was materials to the credit standing motion(s) introduced and described above.
The World Scale Credit score Ranking on this Credit score Ranking Announcement was issued by considered one of Moody’s associates exterior the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Principal 60322, Germany, in accordance with Artwork.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit score Ranking Businesses. Additional data on the EU endorsement standing and on the Moody’s workplace that issued the credit standing is out there on www.moodys.com.
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William V. Fahy VP - Senior Credit score Officer Company Finance Group Moody's Buyers Service, Inc. 250 Greenwich Avenue New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Consumer Service: 1 212 553 1653 Margaret Taylor Affiliate Managing Director Company Finance Group JOURNALISTS: 1 212 553 0376 Consumer Service: 1 212 553 1653 Releasing Workplace: Moody's Buyers Service, Inc. 250 Greenwich Avenue New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Consumer Service: 1 212 553 1653
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