Big Jack Holdings LP Outlook Revised To Stable On Improving Performance And Credit Metrics; Ratings Affirmed

  • Quick service restaurant (QSR) operator Big Jack Holdings LP recently reported improved operating performance and has continued to modestly repay debt, resulting in credit metrics better than our previous forecast.
  • On April 15, 2019, S&P Global Ratings revised its outlook on Big Jack's to stable from negative. At the same time, we affirmed all ratings on the company, including the 'B' issuer credit rating.
  • The stable outlook reflects our expectation that continued growth in sales and EBITDA will support moderate free cash flow generation and stable credit metrics, including leverage in the 5x area.
NEW YORK (S&P Global Ratings) April 15, 2019--S&P Global Ratings today took the rating actions listed above. The outlook revision reflects our expectation that operating performance will continue to strengthen over the coming 12 months leading to a moderate improvement in credit metrics, including adjusted leverage in the low-5x area. We expect higher revenues and sales leverage will offset commodity and labor cost inflation, resulting in a modest increase in adjusted EBITDA margins in 2019. The outlook revision also reflects our belief that Big Jack's will use menu offerings to drive traffic while efficiently managing cost inflation with menu initiatives and modest price increases, resulting in some EBITDA gains.
The stable outlook on Big Jack's reflects our expectation for improved operating performance with positive same-store sales, new unit growth, and profit increases. We also expect modest free cash flows around $10 million to $15 million and moderately improved credit metrics over the next 12 months.
We could consider a downgrade if credit measures deteriorate, with leverage increasing to more than 6x on a sustained basis. This could occur if the company adopted a more aggressive financial policy that leads to a large debt-funded dividend. We could also lower our ratings if the company were unable to profitably grow its restaurant base resulting in negative same-restaurant sales and EBITDA margins contracting more than 150 bps compared to our forecast.
We could raise our ratings if Big Jack's meaningfully builds scale and improves business diversification while continuing to pursue a profitable growth strategy. We would need to believe that, under such a scenario, the company's financial sponsors adopted a more conservative policy such that leverage stays below 5x.
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