Denny's credit facility to include $100 million second-lien term loan

By Sara Rosenberg

New York, Aug. 16 - Denny's Corp.'s proposed credit facility will include a $100 million second-lien term loan in addition to the $200 million five-year senior secured term loan and $75 million senior secured four-year revolving credit facility that was previously announced, according to a market source. The facility is expected to launch on Tuesday.

Banc of America Securities LLC and UBS Securities LLC are joint lead arrangers on the deal, with Banc of America listed on the left.

The $200 million first-lien term loan is talked at Libor plus 350 basis points, a buyside source said. Price talk on the revolver and second-lien term loan were unavailable prior to press time.

Proceeds will be used to refinance the existing credit facility, refinance a portion of existing senior notes and be available for working capital, capital expenditures and other general corporate purposes.

Moody's Investors Service rated the proposed $275 million first-lien bank debt at B2 and the $100 million second-lien facility at B3.

The ratings reflect Moody's expectation that operating profit over the medium term will remain modest relative to cash outflows for interest expense and capital investment, the high degree of financial leverage even after the proposed transaction improves the balance sheet, the history of underinvestment in Denny's store base and the intense competition within the family dining segment of the restaurant industry.

The ratings also reflect substantial reductions in leverage and debt service following replacement of the 2007 and 2008 notes with incremental equity and debt that is lower cost and longer dated, consistent sales and profitability improvements over the past several quarters, the potential liquidity from a meaningful real estate portfolio and control of the well known "Denny's" trade name and concentration of domestic restaurant count in economically expanding regions, Moody's added.

Standard & Poor's assigned a B rating to the $275 million senior secured bank loan and a CCC+ rating to the $100 million second-lien term loan.

The ratings reflect the challenges of improving operating performance in the highly competitive restaurant industry, weak cash flow protection measures and a significant debt burden, S&P said.

Pro forma for the refinancing transaction and equity investment, lease-adjusted total debt to EBITDA is about 5.5x and lease-adjusted EBITDA covering interest is 1.8x for the 12 months ended June 30, S&P added.

Closing on the loan is expected to occur in September.

Speculation is that Denny's will issue $220 million of high-yield bonds to refinance senior notes. However, the credit facility is not contingent on this contemplated bond deal, the market source added.

Denny's is a Spartanburg, S.C., full-service family restaurant chain.

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