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Houston Foods, Inc. -- Moody's changes Houston Foods' (Dhanani Group) outlook to stable; affirms B3 CFR

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Rating Action: Moody's changes Houston Foods' (Dhanani Group) outlook to stable; affirms B3 CFRGlobal Credit Research - 05 Feb 2021New York, February 05, 2021 -- Moody's Investors Service ("Moody's") today affirmed the B3 corporate family rating (CFR) and B3-PD probability of default rating (PDR) of Houston Foods, Inc., ("Houston") borrower and subsidiary of holding company Dhanani Group Inc. ("Dhanani"). In addition, Moody's affirmed Houston's B2 senior secured bank facility ratings. The outlook was changed to stable from negative."The affirmation and change in outlook to stable from negative reflects the significant improvement in operating performance of the company's Popeye's restaurants which more than offset the negative operating trends of its Burger King and La Madeline locations and resulted in earnings and cash flow growth despite government restrictions imposed as a result of the pandemic." stated Bill Fahy, Moody's Senior Credit Officer. Given the exceptional performance of its Popeye's restaurants Houston's debt to EBITDA declined from about 5.0 times at year-end 2019 to around 4.6 times for the LTM period September 30, 2020. "The ratings and outlook also anticipate that even though the same store sales performance of its Popeyes restaurants will moderate materially in part as it laps historic highs in 2020 that the brands earnings contribution will not materially decline from recent levels." Fahy added.Affirmations:..Issuer: Houston Foods, Inc..... Probability of Default Rating, Affirmed B3-PD.... Corporate Family Rating, Affirmed B3....Senior Secured Bank Credit Facility, Affirmed B2 (LGD3)Outlook Actions:..Issuer: Houston Foods, Inc.....Outlook, Changed To Stable From NegativeRATINGS RATIONALEHouston's B3 CFR is constrained by the ongoing government restrictions due to the pandemic, which continues to impact both its Burger King and La Madeline brands as well as its concentration in Texas and Illinois. The ratings also consider the future capital expenditure needs to fund remodel and growth initiatives and acquisitive nature of the company. The ratings also reflect our view that the same store sales performance of its Popeye's restaurants will moderate materially in 2021, in part as the prior year comparison is significant and as government restrictions gradually ease consumers will return to in restaurant dining options. However, the ratings are supported by an expectation that even though Popeyes same store sales will moderate materially its earnings contribution is not expected to significantly decline from recent levels. The ratings and outlook are also supported by Dhanani's multiple brands, with meaningful scale in the Burger King and Popeyes franchise system, and good liquidity. Overall, we believe that quick service restaurants performance have fared better during the pandemic as they already had a base level of revenue generated by their drive-through operations.The corona-virus 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. Moody's regards the corona-virus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety."Dhanani's 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.Restaurants are deeply entwined with sustainability, social and environmental concerns given their operating model with regards to sourcing food and packaging, as well as having an extensive labor force and constant consumer interaction. While these may not directly impact the credit, these factors could impact brand image and change consumer perception of the brand overall.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could result in an upgrade include a clear plan and time line for the lifting of government restrictions and how the easing of restrictions impacts each brand, particularly Popeyes in its ability to drive consistent levels of earnings and cash flows. Quantitatively, a higher rating would require operating performance and financial strategies that support debt to EBITDA sustained below 5.5 times and EBIT coverage of gross interest sustained near 1.75. A higher rating would also require at least good liquidity.Factors that could result in a downgrade include an increase in the level of government restrictions more broadly or an inability of Popeyes to sustain its current level of earnings that result in a deterioration in credit metrics or liquidity. Ratings could also be downgraded in the event that credit metrics and liquidity deteriorated despite a lifting of restrictions on restaurants. Specifically, ratings could be downgraded in the event debt to EBITDA was over 7.0 times or EBIT to interest coverage was below 1.1 times on a sustained basis. The adoption of a financial policy that was more aggressive towards acquisitions or incorporated shareholder distributions could also negatively impact the ratings or outlook.Dhanani, headquartered in Sugarland, Texas, owns and operates 510 Burger King, 334 Popeyes, and 42 La Madeleine franchised restaurants throughout the United States. The company is wholly owned by members of the Dhanani family. Annual revenues are approximately $1.2 billion.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 DISCLOSURESFor 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. 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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. 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