Moody's cuts Franchise first-lien loan

Moody's Investors Service said it trimmed the rating on Franchise Group, Inc.'s senior secured first-lien term loan rating to B1 from Ba3. The agency also revised the outlook to negative from stable and lowered the speculative grade liquidity rating to SGL-3 from SGL-2. Moody’s affirmed Franchise’s other ratings, including the Ba2 senior secured second-lien term loan rating.

The downgrade on the first-lien loan reflects the increase in the size of the company's ABL to $400 million from $250 million and the expectation it will continue to draw under the facility to fund cash flow needs, Moody’s said. The senior secured first-lien term loan is secured by substantially all assets of the company, but it has a second-lien position to the ABL on more liquid assets, including accounts receivable and inventory.

“The outlook change to negative reflects Franchise Group's weaker-than-expected operating performance and credit metrics mostly resulting from a challenging home furnishing environment and poor execution at American Freight, with increased discounting driving softer revenue and lower profitability. When coupled with ongoing capital spending, dividends and the continuation of providing its customers’ financing options, free cash was highly negative for the first nine months of 2022,” the agency said in a press release.

Concerning the SGL-3 rating, it reflects Franchise Group's negative free cash flow and the expectation that while projected to substantially improve from current levels, free cash flow will remain negative over the very near term, though liquidity remains adequate, Moody’s said.

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