Hardee's Hinders CKE's Performance

CKE Restaurants has been experiencing poor operating performance since acquiring the Hardee's brand in 1997, according to Standard & Poor's.

  • 07 May 2004
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Ted Abajian
CKE Restaurants has been experiencing poor operating performance since acquiring the Hardee's brand in 1997, according to Standard & Poor's. As an effort to improve the brand, Hardee's management changed its focus from discount products to premium products. While operating trends are improving, promotional activity by larger competitors, such as McDonald's and Burger King, could challenge the company's strategy of focusing on premium products, S&P notes. CKE operates and franchises quick-service restaurants primarily under the Hardee's and Carl's Jr. brand names.

S&P assigned a B rating to CKE's new $380 million credit facility. The deal, led by BNP Paribas, comprises a $150 million revolver, $170 million first-lien term loan and $60 million second-lien term loan. S&P also assigned a recovery rating of 3 to the facility, indicating a 50-80% recovery of principal in the event of default. The outlook is stable. In addition to the new rating, S&P raised the company's corporate credit rating from B- to B and subordinated debt rating from CCC to CCC+.

"From where we were at the last rating, we're certainly pleased to see upgrades and improvement in the outlook from negative to stable," said Ted Abajian, CKE's executive v.p. and cfo. "It appears to us that S&P is giving us some credit from the stability of Carl's Jr. and the improvements we've made at Hardee's and we're pleased with that."

Proceeds from the deal are being used to refinance the company's existing credit facility, repay $200 million of 9 1/8% senior subordinated notes and for a $20 million share repurchase. The transaction will lower the company's interest rate and improve financial flexibility by reducing amortization payments to $2.3 million per year, S&P says.

CKE still faces challenges from its weak cash flow protection measures, highly leveraged capital structure, limited financial flexibility and operation in a highly-competitive sector. Lease-adjusted total leverage is more than five times.

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  • 07 May 2004

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