Fogo De Chao Inc. Rated #B# On Acquisition By Rhone Debt Rated #B#; Outlook Stable

Stocks and Financial Services Press Releases Wednesday March 14, 2018 09:35
NEW YORK--14 Mar--S&P Global Ratings
NEW YORK (S&P Global Ratings) March 13, 2018--S&P Global Ratings today assigned its 'B' corporate credit rating to Dallas-based Fogo De Chão Inc. The outlook is stable.

At the same time, we assigned our 'B' issue-level and '3' recovery ratings to Fogo's proposed senior secured debt, consisting of a $40 million cash flow revolver facility due in 2023 and a $300 million term loan due in 2025. The '3' recovery rating indicates our expectation for meaningful (50%-70%; rounded estimate: 55%) recovery in the event of a payment default.

The ratings on Fogo reflect its position as a small player in the intensely competitive fine-dining segment of the restaurant industry, single-brand focus with limited ability to pass through price increases, and exposure to fluctuations in commodity prices and currency headwinds in Brazil. We also believe there are some execution risks associated with the company's recent and planned strategic initiatives to improve operating performance under its new ownership structure. These factors are somewhat offset by the company's participation in the highly differentiated Brazilian churrasco dining experience and our view of the company's more favorable labor economics. Fogo sources efficient labor internationally through its visa programs, which could help weathering rising labor wages.

The stable outlook reflects our expectation for relatively stable operating performance and credit metrics over the next 12 months, with adjusted debt to EBITDA to remain in the mid- to high-5x area and interest coverage ratio in the high-2x area. We base this forecast on some net unit growth and adequate sources of liquidity.

We could consider a downgrade if operating performance and credit measures deteriorate meaningfully below our base-case expectations, such that leverage increases to over 6.5x and EBITDA interest coverage declines below 2x. Events that could cause a downgrade include a sharp deterioration in operating performance or significant changes in financial policy that leads to large debt-financed dividends.

An upgrade is unlikely over the next 12 months, given the company's relatively small operation and ownership by financial sponsors that dictate financial policy. Still, we could raise the ratings if the company meaningfully builds scale while successfully executing on a prudent growth strategy, resulting in debt to EBITDA sustaining below 5x and FFO to debt above 15%, with such trends supported by the company's financial policy.

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