Nathan's Famous Inc. Issuer Credit Rating Raised To 'B' On Improved Cash Flow And Credit Metrics; Outlook Stable

  • We expect U.S.-based Nathan's Famous Inc. to generate stable cash flows from an ongoing shift to licensing and less exposure to restaurant operations while maintaining a significant liquidity cushion.
  • S&P Global Ratings raised its issuer credit rating on Nathan's Famous Inc. to 'B' from 'B-'.
  • We are also raising our issue-level ratings on the company's $150 million senior secured notes to 'B' from 'B-'. The '3' recovery rating remains unchanged.
  • The stable outlook is based on our expectation that the company will continue to make steady progress in expanding its licensing and distribution segments to offset weakness in its restaurant business. We expect the company to maintain leverage in the low- to mid-5x range.
NEW YORK (S&P Global Ratings) March 1, 2019--S&P Global Ratings today took the 
rating actions listed above. The higher rating reflects Nathan's increased 
contribution from the less volatile and higher-margin licensing business and 
reduced exposure to restaurant operations, which now represent only about 15% 
of revenues. We expect the company to continue producing good adjusted EBITDA 
margins in the 30% range, and to maintain leverage in the low- to mid-5x area. 
Nathan's has increased the scope of its formula-based pricing strategy in the 
Branded Products Program (BPP) segment, which cushions the impact of volatile 
beef prices and helps to make performance metrics more consistent. The company 
also requires low capital expenditures—about 2% of revenues—to sustain 
operations, which benefits modest free cash flow generation.

The stable outlook reflects our view that leverage will be sustained in the 
low- to mid-5x range over the next 12 months. We expect the high-margin 
licensing segment will continue to contribute to the company's generation of 
sufficient funds from operations (FFO) to cover outflows while the reliance on 
its restaurants gradually diminishes. Due to the company's lack of a revolving 
credit facility, we also expect it to maintain a sufficient cash balance for 
liquidity needs, as it has since issuing senior secured debt in 2015.

We could lower the rating if we expect leverage of about 6.5x or more. This 
could occur if EBITDA declines by 20% below our expectations, which could be 
caused by changing consumer preferences that result in lower sales. We could 
also lower the rating if the company weakens its liquidity position by 
reducing its cash balance to less than $25 million and continues to operate 
without a revolving credit facility, demonstrating a more aggressive financial 
policy.

Although unlikely, we could raise the rating if the company significantly 
expands the business and successfully diversifies its narrow product focus, 
resulting in significant EBITDA growth and improved scale and scope. In this 
scenario, we would also expect a substantial reduction in supplier and/or 
customer concentration related to its key products. A higher rating would also 
be contingent on our belief that company financial policy would support 
sustained credit metric improvement. In the absence of diversification and 
revenue growth, Nathan's would need to demonstrate strengthened credit 
metrics, including adjusted leverage expected to be maintained below 4x.
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