Moody's cuts Boston Chicken ratings
May 5, 1998 11:46 AM
(Press release provided by Moody's Investors Service)
NEW YORK, March 5 - Moody's Investors Service lowered the ratings of Boston Chicken Inc.'s $130 million and $287 million convertible subordinated debentures, due 2004, and the 8% LYONS, due 2015, to Caa3 from B2, and assigned a B3 rating to its $85 million secured revolving credit facility. This concludes the review for downgrade which commenced on October 30, 1997.
The rating outlook is negative. The rating action considers that the company is now in a position to proceed with its plan to convert its loans to the financed area developers, collapsing the Boston Market restaurant system into a wholly owned company operation in the coming weeks.
The ratings reflect Boston Chicken's very high financial leverage; weak bondholder protection in the near term as cash flow is likely to just cover cash interest obligations; the intense competition in the restaurant industry; and our expectation that the company will face additional asset write-downs and special charges given its low returns.
But the ratings recognize that the company has brought in new management to attempt to redress the slide in system wide sales and focus on improving unit level profitability; the company's well established brand identity; and the geographic diversification of its national system of restaurants. The negative rating outlook reflects concern that new management will not be able to turn operations around fast enough to forestall a restructuring of the company's obligations.
The company had sizable cash balances at December 1997, drawing capacity on its $85 million revolving credit and could further support liquidity by monetizing its investment in Einstein/Noah Bagel Corp (current market value $63 million) as well as its real estate holdings. But we expect that the company will use some of this liquidity cushion to proceed with its restructuring, and to meet principal payments under its master lease facility.
The Caa3 ratings on the convertible subordinated debentures and LYONS recognizes that the loss severity in the event of default for this class of creditor would be significant. Ratings could be lowered further if the company is unable to increase unit level performance in the near term, since valuations of the Boston Market system at distressed cash flow levels would provide minimal recovery to the subordinated holders.
The B3 rating on the company's $85 million revolving credit facility recognizes that this facility, along with the $226 million master lease facility, is secured by substantially all of the company's tangible and intangible assets. The rating considers that the collateral (essentially the enterprise value of the Boston Market system) should provide the bank lenders good protection in a distressed scenario. Boston Chicken has historically provided convertible loans to area developers that franchised Boston Market restaurants.
These financed area developers also raised capital from third parties, some of which was provided by BC Equity Funding LLC and Market Partners LLC in the form of preferred equity. The terms of the BCEF and Market Partners preferred equity require the area developer to redeem the investment in the event the company converts its loans. To facilitate the conversion to a 100% company owned system, in March the company entered an agreement to acquire BCEF and Market Partners in exchange for $126 million preferred stock, 3.5 million shares of common stock and $10 million in cash.
The committee elected by the holders of BCEF and Market Partners have approved the transaction and we expect that the company will complete the preferred stock transaction and commence the conversion of the area developer loans over the next several weeks. The conversion to a company owned system of restaurants will enable Boston Chicken to implement operating changes to improve unit level operating performance. But the company's debt burden is significant ($840 million including the obligations under the master lease program).
Given the decline in weekly per store average sales in recent periods, we expect that total debt will be more than 15 times EBITDA, improving to 9 times (run rate EBITDA) if the company is able to increase weekly per store average sales to the $19,000 target by year end. As a result we expect that EBITDA in the upcoming periods will just cover the company's cash interest obligations. Competition in the restaurant and broader food retailing industry is intense.
Boston Market is positioned between the family and quick service segments and we expect that increased pressure will likely come from the traditional food retailing industry that is vying for a share of the home meal replacement segment.
We believe that these factors increase the challenges that management faces to achieve system wide profitability.
Boston Chicken, headquartered in Golden, Colorado, operates and franchises 1,166 Boston Market stores across 38 states and the District of Columbia.
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