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S&P cuts Sbarro senior debt to CCC
Standard & Poor's said it lowered its corporate credit and senior unsecured debt ratings on Sbarro Inc. to CCC from B-. The outlook is negative.
S&P said the downgrade is based on the company's continued poor operating performance, which has weakened cash flow protection measures, and very poor liquidity after the termination of its revolving credit facility. The facility was terminated after the company failed to comply with covenants.
Same-store sales fell 4.6% in the first three quarters of 2003 after declining 4.8% in all of 2002; EBITDA margins for the 12 months ended Oct. 7, decreased to 12% from 18% the year before. Higher cheese prices contributed to the decline.
As a result, EBITDA fell 48% to $19 million in the first three quarters of 2003.
"The ratings on Sbarro reflect the risks associated with operating in the highly competitive restaurant industry, the company's vulnerability to reduced mall traffic, a highly leveraged capital structure, and very limited liquidity," said S&P credit analyst Robert Lichtenstein.
These risks are partially offset by the Sbarro's established brand of Italian specialty foods.
The company is very highly leveraged as a result of the Sbarro family's taking the company private in a $400 million leveraged buyout in 1999.
Total debt to EBITDA was 8x as of Oct. 7 compared with 6x the year before. Liquidity is limited to only cash balances ($31 million as of Oct. 7) as the company's revolving credit facility was terminated. Sbarro had not been in compliance with its amended bank loan covenants in 2003.
S&P said maturities are light, as the company's senior notes do not mature until 2009. S&P said it believes the company will be challenged to service debt and fund capital expenditures. Moreover, the company has contingent liabilities of about $16 million relating to investments in other concepts.
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