Red Lobster Intermediate Holdings LLC Outlook Revised To Negative From #B-# Rating Affirmed

Stocks and Financial Services Press Releases Thursday October 19, 2017 09:08
NEW YORK--19 Oct--S&P Global Ratings

NEW YORK (S&P Global Ratings) Oct. 18, 2017--S&P Global Ratings today revised its outlook on Orlando, Fla.-based seafood casual dining restaurant operator Red Lobster Intermediate Holdings LLC to negative from stable. We also affirmed the 'B-' corporate credit rating on the company.

The outlook revision reflects the recent soft fiscal first-quarter 2018 performance, which has resulted in weak credit metrics and our expectation for a larger-than-anticipated cash flow deficit. As a result, we forecast weaker credit metrics than we previously expected for the year. Though liquidity remains adequate, we expect leverage will remain elevated, partly due to our inclusion of the investment by Thai Union Group PCL as preferred stock and our expectation of no additional debt reduction beyond scheduled amortization. In late 2016, Thai Union acquired a 25% common equity stake in Red Lobster and has the option to increase its ownership by an additional 24% if it converts its preferred shares into common equity.

The negative outlook reflects Red Lobster's weak credit metrics, the likelihood that we could lower the rating over the next year if the company's cash flow position significantly deteriorates, and our expectation that operating performance and traffic continues to contribute to same-store sales in the negative 3% area.

We could lower the rating into the 'CCC' category if we conclude liquidity is deteriorating more than we anticipate, cash generation looks to be negative, and the capital structure becomes unsustainable. This could result from

prolonged negative same-store sales cadence driving strained cash flows that leads to substantial borrowings on the revolver. In this scenario, increasing labor cost, heightened competitive pressures, and volatile commodity costs more than offset expected cost savings. This could also occur if restaurant improvements fail to drive traffic and improve profits.

An outlook revision to stable over the next 12 months is less likely given our view that operating performance will remain under pressure. Still, we could eventually revise the outlook to stable if credit metrics substantially recover from improved market conditions and we think the company can achieve sustained revenue improvement, profit growth, and cash flow improvement.

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