Moody’s Investors Service has lowered all of its ratings of New World Restaurant Group, operater and franchiser of 761 quick-service restaurants principally under the banners Manhattan Bagel and Einstein Bros. Bagels.
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The Eatontown, New Jersey-based firm’s US$140m increasing rate senior secured notes (due June 2003) has been dropped from to Caa2 from B3, its Senior Implied rating to Caa2 from B3, and its Long-term unsecured issuer rating to Ca from Caa1. The rating outlook is negative.
In a press release, Moody’s explained that the ratings consider the immediate liquidity issues facing the company given the imminent maturity of the June 2003 notes. The annualised interest rate on the increasing rate secured note issue is now approaching the 18% cap. New World also must set up a distribution system because the current national distributor has decided to exit the distribution business.
New World must also repay a US$5m investment made by the national distributor at the beginning of the contract. However, it currently has around US$7m of cash on hand and a US$7.5m undrawn revolving credit facility. The ratings could reflect scale advantages from its position as the clear leader in the bagel segment, possible operating advantages as a vertically integrated producer and seller of bagels, and progress that management has made at achieving certain post-merger operating efficiencies. The negative rating outlook considers the likely rating consequences if the company does not revamp its capital
structure in a timely manner.
In Moody’s opinion, total collateral value may not provide for complete repayment of all debt in the event of a default. However, ratings could improve after New World establishes an appropriate long-term capital structure, sets up an efficient distribution network, and improves operating performance measures. The Caa2 rating on the senior secured notes considers that these notes are guaranteed by all operating subsidiaries and are secured by all assets. The lack of owned real estate minimises the potential source of liquidity, but the company could raise funds long term by selling its stores to franchisees.
Based on New World’s total enterprise value, Moody’s said that it believes that the secured notes would achieve substantial recovery in a default scenario. The company achieved an unadjusted EBITDA margin of about 6% for its Q3 ended 2 April 2002 compared to 10% for the prior quarter. Moody’s estimates that lease adjusted debt to EBITDAR equalled about 7x and EBITDA failed to cover cash interest expense.
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