The value of fast-food company AFC Enterprises would be retained even in a bankruptcy scenario because the assets can be used for other purposes or by competitors, leading the bank loan rating to be the same as the corporate rating. Standard & Poor's has assigned a BB rating to the $275 million bank loan, launched into the market on April 26 byCredit Suisse First Boston and J.P Morgan. Jerry Hirschberg, an S&P analyst explained, "Those boxes AFC operates in are not singular in use. Unlike for example, Home Depot." Moody's Investors Service has rated the loan Ba2.
Hirschberg also points to the amount of business AFC does as a positive. Atlanta-based AFC operates almost 4,000 units under Church's Chicken, Popeyes Chicken & Biscuits, Cinnabon and Seattle's Best Coffee. "People like to eat out, especially for lunch and dinner. Their concepts, especially chicken ones, are still popular and the new concepts such as Seattle Coffee are doing okay," he comments. Additionally, throughout this recession, the performance of the chains has not been that impacted, which could be a result of low inflation, he suggested.
A downside is that the sector is very competitive, and these companies tend to overexpand. AFC should continue to grow moderately to diversify, though. Cash flow is good, with EBITDA coverage of interest expense at 4.6 times, and funds from operations to total debt is 28%. Leverage is moderate, with total debt to EBITDA of 2.3 times. The loan is split between a $75 million term loan, a $75 million revolver and a $125 million "B" tranche. Pricing on the five-year pro rata is LIBOR plus 2%, with a 1/2% commitment fee and LIBOR plus 21/ 2% on the "B." Gerald Wilkins, executive v.p. and cfo of AFC, said the two banks snared the lead spots from CIBC World Markets and Goldman Sachs after offering cheaper pricing, among other factors.