Jack in the Box has been able to maintain adequate liquidity by balancing its capital investment program and the refranchising of its company stores. The company has embarked on a major capital investment plan that includes the creation of new units combining restaurants, convenience stores and gas pumps; remodeling stores and growing its Qdoba Mexican Grill fast causal concept, notes Moody's Investors Service. But the company is challenged to achieve an acceptable return on these initiatives particularly in the face of rising competition.
With these efforts in mind, Moody's has assigned Jack in the Box's new bank loan, which comprises an amended $200 million revolver and $275 million term loan, a Ba2 rating. The credit is being led by Wachovia Securities and will refinance the company's existing $150 million term loan and $125 million in senior subordinated notes (see story, page 4). "The key reason [for the refinancing] is to try to lock in today's lower interest rates," explained Richard Baldwin, assistant v.p. and Moody's analyst, noting that the company anticipates $3 million in annual interest cost savings.
Other factors that support the credit include Jack in the Box's relatively high average unit volumes and good cash flow margins. "Another key point is that the restaurants do well in comparison to all other quick-service restaurants," said Baldwin. The company has an average unit volume or average restaurant sales per year of about $1.2 million. Still, Moody's has assigned a negative outlook to the credit in part due to the long-term pressure on the hamburger segment of the quick-service restaurant industry. Debt protection measures for the credit have also moderately declined in the last 18 months with lease-adjusted leverage growing to 4.4 times from 3.9 times and the fixed-charge coverage declining to 2.4 times from 2.9 times. Further deterioration will ultimately depend on the success of the company's capital investment initiatives.