Moody’s downgraded Checkers Holdings, Inc.’s (Checkers) probability of default rating (PDR) to Ca, its corporate family rating (CFR) to Ca from Caa2 and its senior secured bank credit facility to Caa3 from Caa1. The downgrades follow the expiration of the grace period related to Checker’s missed principal payments on its $19.9 million restatement date senior secured first lien term loan and $5.1 million senior secured first lien revolving credit facility that was due April 25, 2023. The limited default designation appended to Checkers’ PDR reflects that the missed payments constitute a default under Moody’s definition, despite Checkers entering into a forbearance agreement. The limited default designation will remain until the company resolves the missed payments. Concurrently, the outlook was changed to negative from stable.
The downgrades reflect governance considerations including the company’s unsustainable capital structure and high likelihood of restructuring as they seek a resolution to the missed principal payments during the agreed-upon forbearance period which currently expires June 1, 2023, and seek to address their other debt maturities. In addition to the currently due restatement date term loan and revolver, Checkers also needs to refinance a first lien term loan due April 2024 and a second lien term due April 2025. At the same time, Checkers needs to improve operating performance in a very competitive hamburger quick-service restaurant sector against a weakening macroeconomic backdrop. The downgrade of the senior secured bank credit facility to Caa3 from Caa1 reflects Moody’s recovery estimates of approximately 60-70%.
The negative outlook reflects Checkers’ diminished liquidity with currently due term loan maturities and approaching 2024 maturity, as well as very high leverage.
Checker’s credit profile is constrained by its very high leverage and weak coverage with debt to EBITDA of about 9.4x and EBIT to interest coverage of around 0.4x for the last twelve-month period ending Sept. 12, 2022. The company is also constrained by its weak liquidity and currently due maturities that were due on April 25, 2023, with uncertainty around its ability to refinance. Checkers operates in the highly competitive hamburger quick-service restaurant segment, which has been hampered by high beef prices as the industry deals with higher wages and a weakening target consumer demographic. The overall environment has contributed to Checkers’ weakened operating performance, including negative same-store sales and pressure on margins. Some positive credit consideration is given to the company’s off-premise focused business model, high level of brand awareness and reasonable scale.