(The following statement was released by the rating agency)Overview
-- Dave & Buster's Entertainment Inc.
, parent of Dave & Buster'sInc., announced that it is suspending its IPO.
-- We are affirming all ratings on Dave & Buster Inc., including our 'B-'corporate credit rating, and removing them from CreditWatch with positiveimplications.
-- The positive outlook reflects the possibility that we might upgradethe company in the next 12 months if it continues to improve its creditprotection measures through earnings growth.
Rating ActionOn Oct. 10, 2012, Standard & Poor's Ratings Services affirmed its ratings onDallas-based restaurant and out-of-home entertainment company Dave & Buster'sInc., including the 'B-' corporate credit rating. At the same time, we removedall ratings from CreditWatch, where they were placed with positiveimplications on Sept. 28, 2012. The outlook is positive.
The ratings on Dave & Buster's Inc. reflect our expectations that creditmeasures over the next 12 months will improve, but remain consistent with a"highly leveraged" financial risk profile under our criteria. We expectleverage to decline slightly on earnings improvement, but we think thecompany's cash flow coverage ratios will remain thin because of still highdebt levels, while it maintains adequate liquidity. The financial risk profilealso incorporates the company's very aggressive financial policy, influencedby its private equity ownership. We view Dave & Buster's business risk profileas "weak" under our criteria because its small-size operations make it moresusceptible to swings in commodity costs and consumer spending.
Credit protection measures improved over the past year, and we expectadditional improvement in the next year on earnings growth. EBITDA hasincreased to about $126 million for the 12-month period ended July 29, 2012,up from $121 million the same time last year. The growth was propelled by newstore openings, same-store sales growth of about 5%, and benefits frommarketing and cost initiatives. Debt to EBITDA declined to 6.2x from nearly6.5x over the same timeframe, and funds from operations (FFO) to debtincreased to 12% from 9%. We expect this trend of improvement to continue inthe next 12 months. The key assumptions under our base case for the next yearinclude the following:
-- Improving unemployment levels of under 8% and modest U.S. grossdomestic product growth of about 2% should fuel same-store sales to themid-single digit area.
-- Cost inflation of about 50 basis points.
-- EBITDA growing to about $130 million on new-store contribution andorganic sales growth.
The company forecasts $71 million in capital spending for 2012, and weanticipate similar levels next year. We think these expenditures will befunded with generated cash flows and existing cash balances.
Given our cash flow expectations, we think debt levels will increase onincremental pay-in-kind (PIK) debt. However, earnings growth should offsetadditional debt. We do not expect any material dividends in the next year.
Considering these assumptions and expectations, we expect leverage to declineslightly to under 6x and FFO to debt to be about 14%. All credit metricsinclude PIK debt issued at the holding company. A key risk to our forecast isthe potential for higher-than-expected commodity costs--which could hurtmetrics meaningfully because of the company's smaller-size operations, andstall the improvement we expecting over the next year.
Dave & Buster's liquidity position should remain adequate over the next 12months in our view. Relevant assumptions in our liquidity analysis are:
-- We believe liquidity sources will exceed uses by at least 1.2x.
-- Sources would continue to exceed uses, even if EBITDA declines by 15%.
-- We expect free cash flow of between $5 million and $10 million onhigher capital spending.
-- Compliance with maintenance financial covenants will likely withstanda 15% drop in EBITDA.
-- Debt amortization is minimal and the credit agreement stipulates acash flow sweep based on leverage ratios.
-- We do not view financial risk as prudent because the ownershipstructure of the company directs financial policy, and its prior use of debtto fund dividends.
Dave & Busters indicated that its cash balances, which totaled nearly $55million at July 29, 2012, will serve as an essential funding source to itscapital spending program. We think its liquidity sources are also supported byits generated cash flows and a $50 million committed revolving creditfacility. We expect cash on hand to decline to about $15 million next year onnew-store openings and renovations, but the revolving credit facility willremain undrawn.
Recovery analysisWe rate the bank credit facilities 'B+' with a recovery rating of '1',indicating our expectation of very high (90% to 100%) recovery in the event ofa payment default. We rate the $200 million senior notes 'CCC+' with a '5'recovery rating, indicating our expectation of modest (10% to 30%) recovery inevent of default. (For the complete recovery analysis, please see our"
7163147&rev_id=6&sid=1005973&sind=A&", published on Feb. 29, 2012, onRatingsDirect.)
The positive outlook on Dave & Buster's incorporates our expectation thatpositive sales trends and earnings growth over the next year will result incredit measures that are in line with a one-notch higher rating. In ourforecast for the next 12 months, modest cost pressures will be offset bysame-store sales growth of 5% and benefits from new store openings, leading toEBITDA margins of about 22% and leverage of slightly under 6x. We also see FFOto debt increasing slightly, to around 14%, albeit still at thin levels. Inour ratings assumptions, we do not foresee material dividends. We think thatif the company can execute its IPO and use the proceeds to reduce debt, anupgrade could occur earlier than we anticipate.
We could revise the outlook to stable if further improvement in creditprotection is not likely, possibly as a result of cost inflation that offsetsthe benefits from new store openings, or if competition heightens and leadsto meaningful promotional activities. These factors could result in EBITDAmargins of slightly under 21% and leverage in the mid-6x area on a sustainedbasis. We could also revise the outlook to stable following debt-financedshareholder initiatives.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The RestaurantIndustry, Dec. 4, 2008
-- Standard & Poor's Revises Its Approach To Rating Speculative-GradeCredits, May 13, 2008
-- Analytical Methodology, April 15, 2008
Ratings ListRatings Affirmed, Recovery Rating Unchanged; CreditWatch/Outlook ActionTo FromDave & Buster's Inc.Corporate Credit Rating B-/Positive/-- B-/Watch Pos/--Dave & Buster's Inc.Senior Secured B+ B+/Watch PosRecovery Rating 1 1Senior Unsecured CCC+ CCC+/Watch PosRecovery Rating 5 5
(Caryn Trokie, New York Ratings Unit)