Overview -- Bloomin' Brands Inc.
, the parent company of OSI Restaurants Partners LLC, completed an IPO and used the proceeds along with cash to reduce debt, achieving significant reduction in debt leverage.
-- We are raising the ratings on OSI Restaurant Partners LLC, including its corporate credit rating, to 'B+' from 'B' based on an improved financial risk profile and continued positive operating performance
-- We also assigned a 'B+' corporate credit rating to Bloomin' Brands Inc., as well as a 'BB' issue rating and a '1' recovery rating to OSI Restaurant Partners LLC's proposed $225 million revolving credit facility due 2017 and $1.0 billion term loan due 2019.
-- The positive outlook reflects our expectation that continued positive operating momentum will contribute to further strengthening of credit metrics.
Rating Action On Oct. 10, 2012, Standard & Poor's Ratings Services raised the ratings on OSI Restaurant Partners LLC, including its corporate credit rating to 'B+' from 'B'. We also assigned a 'B+' corporate credit rating to Bloomin' Brands Inc., the parent company of OSI Restaurant Partners LLC. The outlook is positive for both companies.
At the same time, we assigned a 'BB' issue level rating and a '1' recovery rating to the proposed $225 million revolving credit facility due 2017 and $1.0 billion term loan due 2019.
Proceeds from the new bank facilities will be used to refinance borrowings outstanding under its existing $150 million working capital revolving credit facility due 2013, $100 million capital expenditure revolving credit facility due 2013, and $1.0 billion term loan due 2014. Upon the completion of the refinancing, we will withdraw the ratings on the existing bank facilities.
The rating on Bloomin' Brands Inc. reflects our assessment of its "fair" business risk profile and our expectation that the financial risk profile will remain "aggressive" in the next 12 months. We also believe debt leverage will improve to the mid- to low-4x area because of continued sales and cash flow growth. We expect the recent brand revitalization initiatives and cost savings from productivity improvements to contribute to further strengthening of credit measures in 2012, despite commodity cost pressure and weak consumer spending.
We view Bloomin' Brands' business profile as "fair," reflecting its position as one of the largest casual-dining restaurant companies in the U.S., good progress in its brand revitalization efforts, and improving operating efficiencies. Its brands--Outback Steakhouse, Carrabba's Italian Grill, and Bonefish Grill--all have strong market positions. These factors are partly offset by the intensely competitive and mature nature of the casual dining industry and expected commodity cost pressure. The company's largest competitors are Brinker International and Darden Restaurants Inc.
Our 2012 forecast assumes: -- Sales growth of about 4% -- EBITDA growth of about 3% -- Stable operating margins
-- Improvement of 20 basis points (bps) in the operating margins
-- Weaker, but healthy free operating cash flow
We expect OSI to continue to achieve positive sales growth in 2012 and 2013. We expect sales growth of about 4% because of an increase in comparable-store sales from higher traffic and modest price increases. The improvement in traffic reflects Outback's brand revitalization initiatives and store remodels, as well as lunch day part extension. In our view, initiatives to improve the affordability perception via changes in menu contributed to strengthening consumer traffic and improving sales performance in recent quarters.
For 2013, we expect sales growth to increase to about 5.5% because of comparable-store sales increases and unit growth We also assume higher unit growth of the Carrabba's and Bonefish concepts. We believe that these concepts have good positions, and have good room for growth compared with its peers.
As another part of our base-case forecast, we expect EBITDA to grow about 3% and operating margins to remain relatively stable in 2012. We believe benefits from cost-reduction initiatives and menu price increases will be largely offset by commodity cost pressure and higher operating costs, which include higher rent expense following the sale and leaseback transactions of 67 restaurants.
Despite some cost pressure, we also expect operating margins to improve 20 bps in our forecast, because of positive sales leverage in 2013. We expect free cash flow to weaken relative to the past two years, given increased capital spending to support unit growth. However, we also expect it to remain healthy at about $85 million in 2012 and $100 million in 2013.
We expect operating conditions in the casual-dining segment to remain difficult, because of persistently high unemployment, weak consumer spending, and intense competition. Despite a recent improvement in profitability, OSI's operating margins are lower than those of its key competitors. In addition, while average unit volume (AUV) has increased, unit productivity at Carrabba's and Bonefish lags behind its peers.
We view Bloomin' Brands' financial risk profile as "aggressive". Bloomin' Brands achieved significant debt reduction in 2012, using proceeds from its recent IPO and cash on hand to redeem its 10% $248 million senior unsecured notes due 2015. As part of the refinancing of the CMBS debt, Bloomin' Brands completed a sale and leaseback transaction and used the proceeds of about $195 million as well as cash on hand to repay $276 million of CMBS debt. Given the debt reduction, we expect total debt to EBITDA to fall to about 4.7x by year-end. Given our expectations for revenue growth and stable margin, we expect debt leverage to drop to the mid- to low-4.0x area in 2013.
OSI generated $200 million of free cash flow in 2011 because of reduced capital spending. However, higher capital spending to support the store renovation program will pressure free cash flow conversion, but this should remain at healthy levels of about $85 million in 2012.
We view OSI's liquidity as "adequate," indicating that cash sources should exceed needs over the next 12 to 18 months. Sources of liquidity include cash on the balance sheet of about $280 million as of June 30, 2012, cash flow from operations, and about $115 million of availability under its proposed $225 million revolving credit facility due 2017. We expect free cash flow of about $85 million in 2012 and $100 million in 2013. We believe these sources would adequately cover modest uses of cash, primarily capital spending and required debt amortization under the credit facilities.
Bloomin' Brands' operating subsidiary, OSI Restaurant Partners LLC, needs to meet a total leverage covenant of 6.0x, with a 25-bps step-down by the end of 2013 under the proposed $225 million revolving credit facility. We expect OSI to maintain comfortable cushion under this covenant. The $1.0 billion term loan is covenant-lite. The proposed refinancing extends Bloomins' Brands debt maturity profile, with the proposed term loan due 2019.
Recovery analysis Please see more details in our recovery report on OSI, to be published shortly after this article on RatingsDirect.
The positive outlook reflects our expectation that continued positive operating momentum will contribute to further strengthening of credit measures in the next 12 months, with debt leverage falling toward the mid- to low-4.0x area. We could raise the rating if Bloomin' Brands achieves debt leverage of 4.0x in 2013 as a result of 8% EBITDA growth, while debt drops 10%. An outlook revision to stable could result from a slowdown in sales growth to 3%, while gross margin declines 50 bps. This would result in debt leverage in the high-4.0x area. A negative rating action could also occur if the company adopts a more aggressive financial policy, given its majority ownership by private equity.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Upgraded; Recovery Ratings Unchanged
To From OSI Restaurant Partners LLC Corporate Credit Rating B+/Positive/-- B/Positive/-- Senior Secured BB BB- Recovery Rating 1 1 New Rating Bloomin' Brands Inc. Corporate Credit Rating B+/Positive/-- OSI Restaurant Partners LLC Senior Secured
US$225 mil revolver bank ln due 2017 BB
Recovery Rating 1
US$1 bil term loan B bank ln due 2019 BB
Recovery Rating 1 Not Rated Action To From OSI Restaurant Partners LLC Senior Unsecured NR CCC+ Recovery Rating NR 6
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)