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Checkers Holdings, Inc. -- Moody's affirms Checkers Caa2 CFR; outlook stable

·15 min read

Rating Action: Moody's affirms Checkers Caa2 CFR; outlook stable

Global Credit Research - 14 Jan 2021

New York, January 14, 2021 -- Moody's Investors Service ("Moody's") today affirmed the ratings of Checkers Holdings, Inc. ("Checkers") including its Caa2 corporate family rating (CFR), Caa2-PD/LD (/LD appended) probability of default rating and Caa1 senior secured 1st lien term loan and 1st lien revolver. The outlook was changed to stable from negative.

At the same time, Checkers' Probability of Default Rating was appended with the "/LD" (limited default) designation following its conversion of $52 million of the accreted value of its 2nd lien secured into new series C payment-in-kind (PIK) preferred equity. Moody's constitutes the exchange of 2nd lien debt to preferred equity as a distressed exchange, which is a limited default under Moody's definition of default. Moody's will remove the "/LD" designation from the company's PDR after three days.

The affirmation of the Caa2 CFR reflects governance considerations particularly Checkers' financial strategies given the high risk for further distressed exchanges given its ongoing very high leverage and weak interest coverage. As a part of its recent amendments, Checkers now has the ability to use additional series C PIK preferred equity commitments to purchase 80% of the remaining existing 2nd lien term loan and new money second lien term loan upon satisfaction of certain conditions. Consumer spending remains a key concern as government restrictions and consumer habits remain uncertain due the ongoing coronavirus pandemic as well as waning government support and an unemployment rate that remains high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

"Despite the company's improved operating performance and additional liquidity provided through additional 2nd lien debt, Moody's believes that Checkers ability to improve operating performance to a sustained level that will generate the free cash flow necessary to service its debt and preferred equity on a cash basis remains uncertain," stated Bill Fahy, a senior credit officer with Moody's.

The change in outlook to stable reflects the company's improved same store sales performance over the past several quarters, adequate liquidity and absence of any near term maturities. Checkers' liquidity has improved following an infusion of $20 million of additional liquidity received from the company's owners Oak Hill Capital Partners through a new $25 million 2nd lien term loan. Checkers also entered into an amendment with its 1st lien senior secured term loan lenders which extended by one-year the maturity date of its 1st lien senior secured revolver and 1st lien senior secured restatement date term loan to April 2023. The amendment also relaxed the financial maintenance covenants on all of its 1st lien senior secured debt including its $186 million of outstanding 1st lien senior secured term loan.

Affirmations:

..Issuer: Checkers Holdings, Inc.

.... Probability of Default Rating, Affirmed Caa2-PD/LD (/LD appended)

.... Corporate Family Rating, Affirmed Caa2

....Senior Secured Bank Credit Facility, Affirmed Caa1(LGD3)

..Issuer: Checkers Holdings, Inc.

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

Checkers' Caa2 credit profile is constrained by its very high leverage and weak coverage with debt to EBITDA on a Moody's adjusted basis at about 10.0 times and EBIT to interest coverage of around 0.46 times for the latest 12-month period ended September 30, 2020. Moody's believes that given this high level of leverage that there is a high potential for additional distressed exchanges. The Caa2 rating also acknowledges the uncertainty surrounding the sustainability of the company's recovery given the ongoing coronavirus pandemic and high unemployment. Positive credit consideration is given to the company's off-premise focused business model, high level of brand awareness, reasonable scale, and adequate liquidity.

The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of the restaurant sector from the current weak U.S. economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high.

Checkers private ownership is a rating factor given the potential implications from both a capital structure and operating perspective. Financial policies are always a key concern of privately-owned companies with regards to the potential for higher leverage, extractions of cash flow via dividends, or more aggressive growth strategies.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A higher rating would require that Checkers financial results improve to a level that can support its current capital structure once the Pay-In-Kind (PIK) interest and dividend requirement converts back to cash pay.

Checkers ratings could be downgraded if operating performance does not improve substantially on a sustained basis or should liquidity weaken.

Checkers Holdings, Inc. is the parent holding company of Checkers Drive-in Restaurants, Inc. which owns, operates, and franchises hamburger quick service restaurants under the brand names Checkers and Rally's Hamburgers. Annual revenues are approximately $300 million. Checkers is owned by Oak Hill Capital Partners and management.

The principal methodology used in these ratings was Restaurant Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108012. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

William V. Fahy VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Margaret Taylor Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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