U.S. Markets closed

Relaxed Covenants May Help, But Not Save, Ruby Tuesday

Lisa Allen

NEW YORK (The Deal) -- The relaxed covenants on Ruby Tuesday's new senior credit facility provide more flexibility in the face of deteriorating performance, but the amended debt terms may not be enough to sustain the casual dining chain.

"If the operating performance doesn't improve, liquidity could be a challenge," Moody's Investors Service analyst William Fahy said by phone. "The cash on their balance sheet continues to decline."

Between June 4 and Dec. 3, Ruby Tuesday's cash fell 55%, to $23.6 million from $53 million, Fahy noted.

The Maryville, Tenn., company has replaced its $200 million senior credit facility with a new $50 million senior credit facility and also modified terms on its $53.6 million in mortgage loans, according to its financial report for the quarter ended Dec. 3.

The new terms ease the requirements for Ruby Tuesday's leverage ratio and its fixed-charge covenant.

These terms, as set out in the report, which was filed on Jan. 13, are structured to be more and more forgiving over the course of the year, a trajectory that suggests lenders expect the company's poor financial performance to continue.

The fixed-charge covenant, which measures a company's ability to cover fixed costs such as rent and interest expenses, actually becomes more lenient each quarter through June 6, 2017.

Even so, Ruby Tuesday could have issues with the benchmark. "The fixed-charge covenant could be the most challenging for them," Fahy noted.

With a declining cash balance and no sign of improving performance, Ruby Tuesday's ability to fund its fixed costs internally may deteriorate. On the other hand, the maximum debt-to-Ebitdar ratio covenant, which measures leverage, begins to get stricter by the end of this year. (Ebitdar is earnings before interest, tax, depreciation, amortization and rent costs.)

Ruby Tuesday's allowable leverage ratio starts out at 4.5-to-1 and slips to 5-to-1 on June 3, but returns to a tighter 4.85-to-1 on Dec. 2 and scales down to 4.25-to-1 by June 6, 2017.

The new $50 million senior credit facility bears interest at either Libor plus 250 basis points to 350 basis points, or a base rate plus 150 basis points to 250 basis points, and matures on Dec. 3, 2017.

Bank of America is the administrative agent for the lenders. Wells Fargo Bank and Regions Bank serve as co-syndication agents.

The loan is secured by substantially all of the shares of Ruby Tuesday's stock and present and future subsidiaries, in addition to 47 specific restaurants and their fixtures, which have a market value of about $100 million. In theory, such a collateral agreement is safer for the lenders, since it allowed them to cherry-pick restaurants for collateral.

"It gives the lenders more tangible value by giving them a security on 47 specific restaurants," he noted.

Meanwhile, Ruby Tuesday plans to close 30 of its nearly 800 restaurants, which isn't surprising since consumer spending is down, and casual dining chains are suffering across the board. For example, steakhouse chain Logan's Roadhouse had its rating dropped to Caa2 by Moody's because of poor performance and concerns about the sustainability of its capital structure.

Fortunately for Ruby Tuesday, far-out debt maturities provided the company with some time to work on its operational performance.

It currently has a $222.1 million balance on its senior notes, which bear interest at 7.625% per year and mature on May 15, 2020.

"I think they're doing all the right things now, from an operational perspective," Fahy said. "They're adding more affordable menu items, which is what the consumer wants, but that, in itself, can hurt margins."

Still, traffic at Ruby Tuesday's restaurants is falling. In the second quarter, for example, its traffic was down 6.3% from the first quarter.

"When you go from a decline [in traffic] of 10.8% in the first quarter to 6.3% in the second quarter, it's an improvement, but 6.3% is still a very high number," Fahy warned.

On Nov. 8, Moody's downgraded the chain's corporate family rating to B3 with a negative outlook and lowered the rating on its notes to Caa1.

"Casual dining is the most competitive segment," Fahy said. "I don't see the industry getting better. I think it could be more challenged going forward. It's a very crowded space."

Ruby Tuesday officials didn't respond to requests for a comment.

Its net loss for the quarter ended Dec. 3 was almost $35 million on $276 million in revenue, compared to a net loss of $4.2 million on $300 million in revenue for the same period last year.

The company recorded $972.44 million in assets and $506.29 million in liabilities as of Dec. 3.

Its shares closed at $6.10 on Wednesday, giving it a market capitalization of $374.69 million.

EXCLUSIVE OFFER: See inside Jim Cramer’s multi-million dollar charitable trust portfolio to see the stocks he thinks could be potentially HUGE winners. Click here to see his holdings for FREE.