The coronavirus shutdown is hurting restaurants’ credit ratings.
Late last week, Moody’s Investors Service downgraded the ratings of Red Lobster and the parent company of P.F. Chang’s, Wok Holdings, largely citing the impact of the coronavirus shutdown on the companies’ financials.
Standard & Poor’s had already downgraded the ratings for the companies, both of which were facing credit and financial concerns long before COVID-19 was even a thing.
The downgrades aren’t terribly surprising, given the financial challenges many restaurant companies face in the coming months in an environment with few sales. Yet they also reveal the number of large companies that entered this period on weak footing as it is. Much of the industry was not remotely prepared for anything like this.
Many companies are deep in debt and were facing profitability challenges long before this, as noted by the high number of bankruptcy filings already this year.
California Pizza Kitchen and Checker’s Drive-In Restaurants both received credit downgrades from the major agencies before the coronavirus shutdown, for instance. Big Pizza Hut and Wendy’s franchisee NPC International is facing a potential bankruptcy filing, and big Burger King operator Carrols Restaurant Group was also downgraded and dramatically cut back on capital spending.
To be sure, the franchisees could theoretically receive lifelines that help them navigate some of these challenges as franchisors take more aggressive steps to keep their operators up and running. Federal stimulus dollars could also help a number of companies get through the next three months.
Yet the crisis is hitting the restaurant industry as hard as any, and many companies face bleak prospects in the coming months.
Moody’s cited the outbreak, deteriorating global economic outlook, falling oil prices and asset price declines as “creating a severe and extensive credit shock across many sectors, regions and markets.”
“The combined credit effects of these developments are unprecedented,” Moody’s wrote. “The restaurant sector has been one of the sectors most significantly affected by the shock given its sensitivity to consumer demand and sentiment.”
Privately held companies are also a concern. Private-equity firms have used aggressive leverage to pay themselves dividends when they own a larger chain or to push aggressive growth when they own a smaller concept.
That leverage is now a problem as restaurants face a sudden dearth of sales. The uncertainty over how long the shutdown will last, and what the recovery will look like when it’s over, is also weighing on their ratings.
“Financial policies are always a key concern of privately owned companies with regards to the potential for higher leverage, extractions of cash flow via dividends, or more aggressive growth strategies,” Moody’s…