Overview-- Bloomin' Brands Inc.
, the parent company of OSI RestaurantsPartners LLC, completed an IPO and used the proceeds along with cash to reducedebt, achieving significant reduction in debt leverage.
-- We are raising the ratings on OSI Restaurant Partners LLC, includingits corporate credit rating, to 'B+' from 'B' based on an improved financialrisk profile and continued positive operating performance
-- We also assigned a 'B+' corporate credit rating to Bloomin' BrandsInc., as well as a 'BB' issue rating and a '1' recovery rating to OSIRestaurant Partners LLC's proposed $225 million revolving credit facility due2017 and $1.0 billion term loan due 2019.
-- The positive outlook reflects our expectation that continued positiveoperating momentum will contribute to further strengthening of credit metrics.
Rating ActionOn Oct. 10, 2012, Standard & Poor's Ratings Services raised the ratings on OSIRestaurant 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 forboth companies.
At the same time, we assigned a 'BB' issue level rating and a '1' recoveryrating 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 borrowingsoutstanding under its existing $150 million working capital revolving creditfacility due 2013, $100 million capital expenditure revolving credit facilitydue 2013, and $1.0 billion term loan due 2014. Upon the completion of therefinancing, we will withdraw the ratings on the existing bank facilities.
Rationale
The rating on Bloomin' Brands Inc. reflects our assessment of its "fair"business risk profile and our expectation that the financial risk profile willremain "aggressive" in the next 12 months. We also believe debt leverage willimprove to the mid- to low-4x area because of continued sales and cash flowgrowth. We expect the recent brand revitalization initiatives and cost savingsfrom productivity improvements to contribute to further strengthening ofcredit measures in 2012, despite commodity cost pressure and weak consumerspending.
We view Bloomin' Brands' business profile as "fair," reflecting its positionas one of the largest casual-dining restaurant companies in the U.S., goodprogress in its brand revitalization efforts, and improving operatingefficiencies. Its brands--Outback Steakhouse, Carrabba's Italian Grill, andBonefish Grill--all have strong market positions. These factors are partlyoffset by the intensely competitive and mature nature of the casual diningindustry and expected commodity cost pressure. The company's largestcompetitors 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-storesales from higher traffic and modest price increases. The improvement intraffic reflects Outback's brand revitalization initiatives and storeremodels, as well as lunch day part extension. In our view, initiatives toimprove the affordability perception via changes in menu contributed tostrengthening consumer traffic and improving sales performance in recentquarters.
For 2013, we expect sales growth to increase to about 5.5% because ofcomparable-store sales increases and unit growth We also assume higher unitgrowth of the Carrabba's and Bonefish concepts. We believe that these conceptshave 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 benefitsfrom cost-reduction initiatives and menu price increases will be largelyoffset by commodity cost pressure and higher operating costs, which includehigher rent expense following the sale and leaseback transactions of 67restaurants.
Despite some cost pressure, we also expect operating margins to improve 20 bpsin our forecast, because of positive sales leverage in 2013. We expect freecash flow to weaken relative to the past two years, given increased capitalspending to support unit growth. However, we also expect it to remain healthyat about $85 million in 2012 and $100 million in 2013.
We expect operating conditions in the casual-dining segment to remaindifficult, because of persistently high unemployment, weak consumer spending,and intense competition. Despite a recent improvement in profitability, OSI'soperating margins are lower than those of its key competitors. In addition,while average unit volume (AUV) has increased, unit productivity at Carrabba'sand 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 itsrecent IPO and cash on hand to redeem its 10% $248 million senior unsecurednotes due 2015. As part of the refinancing of the CMBS debt, Bloomin' Brandscompleted a sale and leaseback transaction and used the proceeds of about $195million as well as cash on hand to repay $276 million of CMBS debt. Given thedebt reduction, we expect total debt to EBITDA to fall to about 4.7x byyear-end. Given our expectations for revenue growth and stable margin, weexpect 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 reducedcapital spending. However, higher capital spending to support the storerenovation program will pressure free cash flow conversion, but this shouldremain at healthy levels of about $85 million in 2012.
Liquidity
We view OSI's liquidity as "adequate," indicating that cash sources shouldexceed needs over the next 12 to 18 months. Sources of liquidity include cashon the balance sheet of about $280 million as of June 30, 2012, cash flow fromoperations, and about $115 million of availability under its proposed $225million 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 wouldadequately cover modest uses of cash, primarily capital spending and requireddebt amortization under the credit facilities.
Bloomin' Brands' operating subsidiary, OSI Restaurant Partners LLC, needs tomeet a total leverage covenant of 6.0x, with a 25-bps step-down by the end of2013 under the proposed $225 million revolving credit facility. We expect OSIto maintain comfortable cushion under this covenant. The $1.0 billion termloan is covenant-lite. The proposed refinancing extends Bloomins' Brands debtmaturity profile, with the proposed term loan due 2019.
Recovery analysisPlease see more details in our recovery report on OSI, to be published shortlyafter this article on RatingsDirect.
Outlook
The positive outlook reflects our expectation that continued positiveoperating momentum will contribute to further strengthening of credit measuresin the next 12 months, with debt leverage falling toward the mid- to low-4.0xarea. We could raise the rating if Bloomin' Brands achieves debt leverage of4.0x in 2013 as a result of 8% EBITDA growth, while debt drops 10%. An outlookrevision to stable could result from a slowdown in sales growth to 3%, whilegross margin declines 50 bps. This would result in debt leverage in thehigh-4.0x area. A negative rating action could also occur if the companyadopts a more aggressive financial policy, given its majority ownership byprivate 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
Ratings List
Upgraded; Recovery Ratings Unchanged
To FromOSI Restaurant Partners LLCCorporate Credit Rating B+/Positive/-- B/Positive/--Senior Secured BB BB-Recovery Rating 1 1New RatingBloomin' Brands Inc.Corporate Credit Rating B+/Positive/--OSI Restaurant Partners LLCSenior 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 1Not Rated ActionTo FromOSI Restaurant Partners LLCSenior Unsecured NR CCC+Recovery Rating NR 6
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)
((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging:pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))