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Another whole-biz downgrade on the menu for TGI Fridays

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A $425 million franchise-fee securitization sponsored by TGI Fridays has taken another ratings hit because of the 796-store chain’s increasingly poor financial performance, now magnified by COVID-19 stresses.

S&P Global Ratings has downgraded the 2017-vintage whole business securitization to a highly speculative B+ rating, a three-notch drop from its prior BB+ grade.

S&P warned of possible further downgrades to come due to the “vulnerable” market position for the long-struggling, 796-store casual restaurant chain. It was the second downgrade since February 2019 by S&P since an initial investment-grade ‘BBB-‘ rating was affixed to the TGIF Funding LLC 2017-1 transaction three years ago.

The TGIF deal, which has a Class A variable-funding note and a Class A-2 bond tranche, will now have little cushion against falling into the extremely high-risk triple-C tier.

The ongoing downgrade watch by S&P “ implies a 50% probability of a further downgrade on the notes should the transaction's performance continue to deteriorate due to COVID-19,” S&P’s report stated, “compounded with the notion that consumers may be slow to return even after more stringent social distancing precautions are lifted.

The deal maintains a BB rating with Kroll Bond Rating Agency, although Kroll is considering its second downgrade of the notes, as well. According to Kroll, the Class A-2 notes had an outstanding balance of $369.37 million on April 13; the VFN was drawn by $15 million in January 2020.

TGI Fridays’ woes are longstanding, with the company having gone through three years of negative same-store sales figures “even before COVID-19 mandated closures eliminated sales channels,” S&P’s report stated. Quarterly system-wide sales volume fell from $2.5 billion at the time of the transaction’s closing to $1.8 billion in the most recent reporting period, according to S&P.

The company’s cash flow has become “constrained,” with a debt service coverage ratio (1.77x) that is approaching the 1.75x cash-trapping trigger to amortize the outstanding A-2 notes.

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Whole business securitization Downgrades