Fitch Report: Heightened Credit Risk Continues in the Restaurant Sector - Highly Lvgd Most at Risk

The restaurant industry continues to endure the negative effects of the U.S. recession and the credit crisis in 2009, according to a new report released today by Fitch Ratings. Most companies in the industry are facing rising borrowing costs caused by the combination of a challenging operating environment and difficult credit conditions. The quick-service restaurant (QSR) segment, however, is better positioned to withstand the current economic stress and market downturn.

"Given that efforts to stimulate the economy will take time to materialize, a sustainable turnaround is still not anticipated in 2009," said Carla Norfleet Taylor, Director at Fitch Ratings.

According to the report, Fitch expects the following themes to continue to permeate the industry in 2009:

--Sluggish same-store sales growth, which will continue due to rising unemployment, low consumer sentiment and reduced discretionary spending.

--Moderating food cost inflation; however, the benefits realized depend on the timing of contract expirations and exposure across various commodities.

--Reductions in capital expenditures and new unit development, primarily in full-service dining, as firms focus on maintaining adequate liquidity.

Since many firms in the restaurant industry are displaying weaker credit profiles, those having to renegotiate bank credit agreements are facing more stringent borrowing terms, at a time when access to the bond market is challenging at best. "Preserving liquidity and maintaining strong bank relationships is paramount in this environment and will be the focus of most management teams," said Wesley E. Moultrie, II Senior Director at Fitch Ratings.

"While credit profiles are weakening across the industry, most of the large investment grade chain restaurants have limited near-term maturities and are currently generating free cash flow. They therefore have ample liquidity to weather the downturn," added Taylor.

Default risk has increased for highly leveraged chains, franchisees and independents, as seen by the number of bankruptcy filings in the family dining and bar and grill segments during 2008. "While the restaurant industry is extremely fragmented, in aggregate outstanding debt and loan obligations for those entering bankruptcy could be considerable," said Taylor.

The following is a list of publicly rated Restaurant or Foodservice companies and their current Fitch Issuer Default Ratings(IDR) and Outlooks:

--McDonald's Corporation: 'A', Stable Outlook

--Burger King Corporation: 'BB', Positive Outlook

--YUM! Brands, Inc.: 'BBB-', Stable Outlook

--Darden Restaurants, Inc.: 'BBB', Negative Outlook

--ARAMARK Corporation, 'B', Stable Outlook

The full report, 'U.S. Restaurants/Foodservice, Heightened Credit Risk Continues - Highly Leveraged Firms at Risk' is available on the Fitch Ratings' web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.