Rating Action: Moody's upgrades Telepizza's CFR to Caa2 following new debt and equity financing; positive outlook
Global Credit Research - 14 Jan 2021
Madrid, January 14, 2021 -- Moody's Investors Service ("Moody's") has today upgraded to Caa2 from Caa3 the corporate family rating (CFR) and to Caa2-PD from Caa3-PD the probability of default rating (PDR) of Foodco Bondco, S.A.U. ("Telepizza" or "the company"), the parent company of Spanish pizza delivery operator Food Delivery Brands (formerly known as Telepizza). Concurrently, Moody's has upgraded to Caa2 from Caa3 the rating on the E335 million senior secured notes due 2026 issued by Foodco Bondco, S.A.U. The outlook has been changed to positive from negative.
"We have upgraded Telepizza's ratings to Caa2 following the company's announcement that it had arranged new debt and equity financing, resulting in at least E50 million cash inflow, which would substantially strengthen its liquidity and abate the risk of a distressed debt restructuring, which we previously considered a likely outcome," says Igor Kartavov, a Moody's lead analyst for Telepizza.
"The positive outlook reflects our view that the ratings could be further upgraded if Telepizza's operating performance continues to recover, so that its credit metrics return to more sustainable levels, and if the company successfully concludes its ongoing negotiations with Yum! Brands regarding the terms of the Pizza Hut master franchise agreement," adds Mr. Kartavov.
A full list of affected ratings is provided towards the end of the press release.
The upgrade of Telepizza's ratings follows the company's announcement on 22 December 2020  that it had arranged a new financing package comprising a E40 million loan facility and an up to E42 million equity injection from the existing shareholders, primarily private equity firm KKR, which is Telepizza's controlling shareholder. The loan facility will be provided by Banco Santander and Instituto de Crédito Oficial (ICO), the Spanish government's specialised lending institution, for a 5-year term, and the part provided by Banco Santander will be guaranteed by the ICO. The E40 million facility will comprise the rollover of Telepizza's existing E10 million state-guaranteed loan. Conditions to utilization of the loan facility include, among others, the confirmation of ICO guarantee and a E20 million upfront equity injection. The company expects these conditions to be fulfilled by the end of January 2021. Moody's views the execution risks to put the new financing in place as low. The remaining E22 million equity injection is conditional on the company's cash balances falling below a certain threshold.
Moody's views the shareholders' commitment to provide equity financing to Telepizza in order to strengthen its liquidity as a governance consideration under the rating agency's ESG framework and one of the key factors for today's rating action. While the equity injection is credit positive, Moody's notes that its size (E20 million) is relatively small compared to the company's total adjusted debt of E547 million as of 30 September 2020.
The new financing, if put in place as planned, will abate the risk of a distressed debt restructuring, in Moody's view. In May 2020, Telepizza announced that it had engaged external advisors to evaluate the options of establishing a more sustainable capital structure and improving liquidity, and that it would need between E95 million and E115 million of additional funding, including drawings under its E45 million revolving credit facility (RCF), to execute its business plan and maintain adequate liquidity.
Given the company's deteriorated liquidity position and very weak credit metrics, Moody's viewed the risk of a distressed debt restructuring as high. However, the rating agency now believes that the announced financing package, coupled with the full utilisation of the RCF in March 2020 and the E10 million state-guaranteed loan raised in June 2020, provides sufficient funds for Telepizza's operations and execution of its business plan in the next 12-18 months and entails the termination of the company's discussions with its noteholders.
The new financing will also significantly improve Telepizza's liquidity. Moody's estimates that the company had a cash cushion of around E35 million as of year-end 2020, and will have to pay a E10.5 million semiannual coupon on its notes on 15 January 2021. Given the company's significant net working capital swings related to royalties receivable and payable, its sizeable investment programme, fully drawn RCF and still-low earnings, its liquidity would have become increasingly tight in the course of 2021. In Moody's view, the new financing will ensure that Telepizza maintains adequate liquidity in the next 12-18 months even if its internal cash generation remains weak, although there is significant uncertainty regarding the company's earnings, net working capital evolution and investment programme.
In May 2020, Telepizza also announced that it had initiated negotiations with its strategic partner Yum! Brands regarding the terms of the master franchise agreement for the use of the Pizza Hut brand. Moody's understands that these discussions are still ongoing but are currently in advanced stage. Given the significance of the strategic alliance with Yum! Brands for the company's operating model and the potential impact that a change in its terms might have on Telepizza's future credit metrics, the successful completion of these negotiations would be an important step in order to develop further upward pressure on the rating.
Despite the ongoing recovery in its financial and operating performance since May 2020, Telepizza's business remains negatively affected by the coronavirus pandemic. In the first nine months of 2020, the company's systemwide sales and company-adjusted EBITDA declined by 21% and 73%, respectively, year-on-year (24% and 59%, respectively, in Q3 2020). Based on the company's preliminary estimates, in November 2020 its systemwide sales and company-adjusted EBITDA remained approximately 20% and 50% below the respective average 2019 levels.
Telepizza's operations in Latin America, which accounted for 51% of its systemwide sales in 2019, have suffered a more protracted decline in sales and earnings compared to the company's EMEA business and exhibit slower recovery because of the higher share of dine-in channel, stricter and more prolonged lockdowns and weaker macroeconomic environment and consumer sentiment. Given the continuing spread of the coronavirus pandemic, very early stage of vaccination campaign and fragile macroeconomic conditions, the pace of recovery in Telepizza's performance, particularly in Latin American markets, remains highly uncertain. However, the positive outlook factors in Moody's expectation that Telepizza's sales and earnings will continue to gradually grow in 2021 as the spread of the pandemic is curtailed and the social distancing measures are progressively relaxed.
At the same time, Moody's cautions that this expected improvement in performance remains exposed to multiple risks, including (1) the increasingly tight competitive environment shaped by the changes in customer behavior on the back of the coronavirus pandemic and the ambitious growth plans of Telepizza's competitors; (2) the potential for commodity price inflation, which could put pressure on Telepizza's margins; and (3) the foreign exchange risk stemming from the company's exposure to the volatile Latin American currencies.
The Caa2 rating of the E335 million 6.25% senior secured notes due 2026 issued by Foodco Bondco, S.A.U. is in line with the CFR, reflecting the fact that they represent most of the company's financial debt. However, the notes are subordinated to the E45 million super senior RCF due 2025, which is currently fully drawn. The senior secured notes and the super senior RCF share the same security package, with the RCF benefitting from priority claim on enforcement proceeds. The notes and the RCF also benefit from guarantees provided by operating subsidiaries of the group. The security package comprises pledges over the shares of notes' issuer and guarantors, bank accounts and intragroup receivables.
Moody's has assumed that the new E40 million loan facility to be raised by Telepizza will rank pari passu with the notes. Moody's has also assumed that the E20 million equity injection will be provided in the form of either common equity or a hybrid instrument that would qualify for a 100% equity credit under the rating agency's Hybrid Equity Credit methodology.
The Caa2-PD PDR reflects Moody's assumption of a 50% family recovery rate, in line with the rating agency's standard approach for capital structures that include both bonds and bank debt.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects Moody's expectation that Telepizza's operating and financial performance will continue to recover from the detrimental impact of the coronavirus pandemic, resulting in an improvement in the company's credit metrics towards more sustainable levels. Quantitatively, Moody's expects Telepizza's Moody's-adjusted gross debt/EBITDA to decline towards 8.0x in the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A further upgrade of Telepizza's ratings would require (1) the successful completion of its negotiations with Yum! Brands; (2) the evidence of further recovery in the company's operating performance, so that its credit metrics return to sustainable levels; (3) greater clarity on the company's strategy and business plan, particularly in the context of the recent CEO change, the potential changes in terms of the alliance with Yum! Brands and evolving consumer preferences, such as the growing popularity of home delivery channel and digital tools; and (4) continuing adequate liquidity.
A downgrade of Telepizza's ratings is currently unlikely, given the positive outlook. Telepizza's ratings could be downgraded if its financial performance does not recover so that the company's liquidity materially deteriorates.
LIST OF AFFECTED RATINGS
..Issuer: Foodco Bondco, S.A.U.
....Probability of Default Rating, Upgraded to Caa2-PD from Caa3-PD
....Corporate Family Rating, Upgraded to Caa2 from Caa3
....Senior Secured Regular Bond/Debenture, Upgraded to Caa2 from Caa3
....Outlook, Changed To Positive From Negative
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.
Founded in 1987 and headquartered in Madrid, Telepizza is a leading pizza delivery operator, with operations concentrated mainly in Spain, Portugal and Latin America. Following its alliance with Yum! Brands, effective since December 2018, Telepizza has become the exclusive master franchisee of the Pizza Hut brand in Latin America (excluding Brazil), the Caribbean, Spain, Portugal and Switzerland. As of 30 September 2020, Telepizza had a network of 2,532 stores, including 1,414 stores under the Telepizza brand and 1,118 stores under the Pizza Hut brand. For the nine months ended 30 September 2020, the company reported revenue of E257 million and company-adjusted EBITDA of E14 million (both numbers excluding the effect of IFRS16). Telepizza is majority owned by funds advised by private equity firm KKR, which hold a 84.3% stake in the company.
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 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.
 Company press release dated 22 December 2020
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Igor Kartavov Analyst Corporate Finance Group Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Ivan Palacios Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Espana, S.A. Calle Principe de Vergara, 131, 6 Planta Madrid 28002 Spain JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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