S&P: liquidity concerns reduce debt ratings for Buffets, Vicorp

Nation's Restaurant News,  Oct 8, 2007  

Tags: liquidity, S&P

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NEW YORK -- Standard & Poor's Credit Rating Services has reduced the already noninvestment-grade debt ratings for both Buffets Holdings Inc. and Vicorp Restaurants Inc., citing weak liquidity for the two companies and possible future debt covenant violations.

Eagan, Minn.-based Buffets operates 632 steak-buffet restaurants under the HomeTown Buffet, Old Country Buffet, Ryan's and Fire Mountain brands, as well as 10 Tahoe Joe's Famous Steakhouse restaurants. It franchises an additional 18 restaurants. S&P said its decision last month to reduce Buffets' debt rating was based on "concern that the company will fail to comply with the maximum leverage ratio covenant of its senior secured credit agreement in the coming quarters," said credit analyst Charles Pinson-Rose. "Noncompliance will further constrain the company's already weak liquidity," he added.

Buffets acquired Ryan's Restaurant Group for $876 million last year and took on high debt levels. Its chains have struggled, with same-store sales down 6.3 percent at Ryan's and 0.7 percent at the buffet brands for the year ended in June. S&P said that "as a result of poor performance at the company's restaurants, [available earnings] for covenant purposes has dropped precipitously over the past three quarters," falling to $148.1 million as of June 27, from $171.4 million as of April 4, which was down from $182.6 million as of last Dec. 13.

At Denver-based Vicorp, which operates or franchises 409 family-dining restaurants under the Bakers Square and Village Inn brands, "poor operating trends" also caused the downgraded debt rating, S&P said.

"If the poor performance continues, we think that Vicorp will breach [certain debt] covenants in the coming quarters," PinsonRose said.

S&P said that while Vicorp amended its credit facility in July to lower the trailing, adjusted EBITDA covenant to $24 million from $28 million, corporate profitability had declined through the first three quarters of fiscal 2007 versus fiscal 2006.

"The outlook is negative and indicates that we would lower the rating [again] if poor operating performance or a covenant violation further strains liquidity," Pinson-Rose said.

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