Einstein loan for special dividend 'speculative'

by Josh Sosland
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NEW YORK -- Moody’s Investors Service on Oct. 18 assigned a B2 rating to proposed debt for Einstein Noah Restaurant Group, including $25 million in a senior secured revolving credit facility and a $240 million senior secured loan.

Einstein is planning to use proceeds to fund a special shareholder dividend of up to $160 million and to refinance outstanding debt.

The B2 debt rating is defined by Moody’s as “speculative and subject to high credit risk.”

If Einstein Noah were to borrow even more money than currently expected, the ratings impact could be negative, Moody’s said.

Additionally, Moody’s gave Einstein a B3 corporate family rating, Caa1 probably of default rating and SGL-2 speculative grade liquidity rating. The outlook is stable.

“The B3 Corporate Family Rating reflects Einstein's high leverage and modest coverage, and our concern that soft consumer spending and the highly competitive environment will continue to pressure persistently weak customer traffic trends, earnings and debt protection metrics,” the company said. “The ratings also consider the company's financial policy, which we consider fairly aggressive given the proposal to raise debt by approximately $170 million in part to fund a distribution to shareholders. The ratings are supported by the company's material level of brand awareness, reasonable scale, and good liquidity.”

Moody’s said it has given the company a stable outlook because of Einstein’s focus on menu innovation and offering greater consumer volume, steps the ratings agency said “should help to decelerate negative traffic trends over time. These initiatives along with various cost saving plans should also help to improve leverage at the restaurant level and result in improved earnings and debt protection metrics.”

Should the business improve to the point the company’s debt to EBITDA falls to 5.25, an upgrade may be possible.

“There could be downward ratings pressure in the event the company is not able to stabilize negative traffic trends or a deterioration in operating performance results in an inability to improve credit metrics over the intermediate term,” Moody’s said. “Specifically, a downgrade could occur if debt to EBITDA approached 6.5 times or EBITA to interest migrated towards 1.1 times on a sustained basis. A deterioration in liquidity for any reason could also result in negative ratings pressure.”

Einstein Noah has annual revenues of about $424 million.

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