PHD Group Holdings LLC Outlook Revised To Stable From Negative On Improving Performance; Ratings Affirmed

  • We expect fast-casual restaurant operator PHD Group Holdings LLC (Portillo's) will execute on its strategic plans to strengthen same-store-sales while continuing to open high-volume restaurants in new markets successfully.
  • We revised our outlook on Portillo's to stable from negative and affirmed our 'B-' issuer credit rating.
  • At the same time, we revised our recovery rating on the first-lien term loan to '3' (50%-70%; rounded estimate 55%) from '4' based on a modest increase in our expected valuation in a hypothetical default. The 'B-' issue rating is unchanged.
  • The stable outlook reflects our expectation for improving same-store sales, relatively steady margins, and continued earnings growth, resulting in modestly better credit metrics over the next 12 months.
BOSTON (S&P Global Ratings) Feb. 22, 2019--S&P Global Ratings today took the 
rating actions listed above. The outlook revision reflects our view that 
performance will improve as Portillo's strengthens restaurant level operations 
while successfully managing its aggressive growth objectives. The company's 
renewed focus on employee training, increased automation, and ongoing 
investments in off-premise capabilities should improve speed of service times 
and result in better overall customer experiences. In our view, these efforts 
will drive higher customer transactions and high-single-digit earnings growth, 
resulting in modestly better cash flow generation in 2019. 

The stable outlook reflects our expectation that Portillo's renewed focus on 
operational improvement initiatives will drive better performance results over 
the next 12 months. We forecast that the company's credit metrics will improve 
modestly from earnings growth, fixed-charge coverage will exceed 1x, and 
liquidity will remain adequate.

We could lower our rating on Portillo's if we no longer view the company's 
capital structure as sustainable. This could occur if the company is unable to 
maintain adequate liquidity or if operating performance deteriorates 
significantly. We would view increased reliance on the revolver with less than 
20% headroom on the springing leverage covenant as indicative of less than 
adequate liquidity. A downgrade could also occur if there are indications 
Portillo's would not be able to refinance its credit facilities in a timely 
manner (at least one year in advance). Possible scenarios leading up to a 
negative rating action could include intensifying competition, rising costs 
due to an unforeseen spike in commodity prices, or weaker than expected 
operating performance in new markets.

Although unlikely over the next 12 months, we could raise the rating if cash 
flow generation improves meaningfully, the company reduces adjusted leverage 
to below 6x, and we view the likelihood of a releveraging event as unlikely.
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