Fitch Ratings has affirmed and withdrawn the 'B' Long-term Issuer
Default Rating (IDR) for DineEquity, Inc. (DineEquity; NYSE: DIN). The
rating withdrawal follows DineEquity's refinancing of its secured credit
facility and 9.5% senior unsecured notes with a whole business
securitization. At Sept. 30, 2014, DineEquity had approximately $1.4
billion of total debt.
KEY RATING DRIVERS
High Financial Leverage
DineEquity's credit metrics are in line with Fitch's forecast and are
expected to remain reflective of a 'B' rated restaurant company over the
near-term. For the latest 12-month (LTM) period ended Sept. 30, 2014,
total adjusted debt-to-operating EBITDAR was 5.8, operating
EBITDAR-to-interest plus rent was 1.9x and FFO fixed charge coverage was
1.7x.
Good Cash Flow Generation
DineEquity's cash flow is supported by the firm's 99% franchised system,
which provides a steady source of royalty-based high-margin revenue and
has minimal capital requirements. Cash flow will benefit from the firm's
recent refinancing as management expects annual pre-tax interest savings
to approximate $34 million. DineEquity revised its 2014 operating cash
flow and FCF guidance upward as a result of the refinancing and
management's improved same-restaurant sales (SRS) outlook, discussed
below.
Shareholder Friendly Financial Strategy
DineEquity increased its quarterly dividend by 17% to $3.50 annually and
availability under its share repurchase authorization to $100 million
due to the interest savings resulting from its securitization
transaction. The firm's stated financial strategy is to maximize the
business in order to return significant FCF to shareholders.
DineEquity's dividend payout as a percentage of earnings is one of the
highest in the industry.
Significant Scale and Diversification
DineEquity benefits from the scale and diversification provided by its
two national brands. At Dec. 31, 2013, DineEquity's system consisted of
3,631 restaurants, of which 2,011 were Applebee's Neighborhood Grill and
Bar (Applebee's) and 1,620 were International House of Pancakes (IHOPs).
Total system-wide sales approximated $7.4 billion with average annual
restaurant sales for franchised units being about $2.4 million for
Applebee's and $1.8 million for IHOP.
DineEquity is exploring the acquisition of a third non-competing brand
to scale its shared services infrastructure and provide additional new
unit development opportunities for existing franchisees. Management has
indicated that nothing is imminent.
Same-Restaurant Sales
Applebee's domestic system-wide SRS increased 1.7% and 0.6% during the
quarter and nine months ended Sept. 30, 2014, respectively. In each case
a higher average check was partially offset by a decline in traffic.
IHOP's domestic system-wide SRS rose 2.4% and 3.2% during the quarter
and nine months ended Sept. 30, 2014, respectively. Traffic was slightly
positive in the quarter, after being negative for the nine-month period.
For the full year, DineEquity projects that Applebee's SRS will be flat
to 1%, versus the firm's prior expectations of between negative 2% and
positive 1%. Management has guided for 2.5% to 3.5% for IHOP, an
increase from its previous guidance of 1% to 2%. Sales are benefitting
from menu innovation and effective marketing, which are helping to
differentiate Applebee's and IHOP from the competition. Examples include
Applebee's All You Can Eat Crosscut Ribs and IHOP's numerous holiday
pancake varieties and Thanksgiving meals limited time offers.
Liquidity and Maturities
DineEquity's liquidity is adequate given the firm's FCF and limited
near-term maturities. At Sept. 30, 2014, DineEquity had over $200
million of liquidity inclusive of $133 million of cash and availability
under the firm's $75 million revolver which has been terminated.
DineEquity's $1.3 billion of new securitized notes have a 30-year legal
final maturity and a 7-year anticipated repayment date resulting in no
upcoming maturities.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology; Including Short-Term Ratings and Parent
and Subsidiary Linkage' (May 2014);
--U.S. High Yield Food, Beverage, Restaurant, and Consumer Products
Handbook (Event Risk: Merger and Acquisition Activity Continues to
Dominate the Landscape) (August 2014)
--'U.S. Restaurant FAQ: Inquiring Minds Want to Know' (March 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
U.S. High Yield Food, Beverage, Restaurant, and Consumer Products
Handbook (Event Risk: Merger and Acquisition Activity Continues to
Dominate the Landscape)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749774
U.S. Restaurant FAQ: Inquiring Minds Want to Know (Highlights from
First-Quarter 2014 Discussions with Investors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741558
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=924515
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