OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-'Long-term Issuer Default Rating (IDR) for Brinker International, Inc. (Brinker; NYSE: EAT). Fitch has also assigned a 'BBB-' rating to the company's new \$750 million revolving credit facility. The Rating Outlook is Stable. A full list of ratings is at the end of this release.

At Dec. 24, 2014, Brinker had \$929 million of total debt.

KEY RATING DRIVERS:

Relatively Stable Credit Statistics

For the latest 12 months (LTM) ended Dec. 24, 2014, total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rent-to-operating EBITDA plus gross rents) was 3.1x. LTM operating EBITDAR-to-gross interest expense plus rent and free cash flow (FCF; defined as cash flow from operations less capex and dividends) were 4.1x and \$137 million, respectively.

Fitch projects that total adjusted debt-to-operating EBITDAR will be 3.2x and 3.3x, respectively, for the June fiscal 2015 and 2016 year and that operating EBITDAR-to-gross interest expense plus rent will be roughly 4x. Fitch also estimates that annual FCF will approximate \$125 million in fiscal 2015, potentially increasing to over \$150 million in 2016 due to lower remodeling capex.

Modestly Aggressive Financial Strategy

Brinker's cash flow priorities are to reinvest in its business, maintain at least \$50 million of cash, and return cash to shareholders. Capex has averaged 4.8% of sales over the past three years, versus 2%-2.5% previously, as a result of remodeling. During the same time period, dividends have been in line with Brinker's targeted 40% dividend-to-earnings per share payout, and yearly share buybacks net of proceeds from the exercising of stock options have averaged about \$280 million.

Brinker's dividend payout-to-earnings ratio is near the middle of the range for restaurant peers. However, the use of incremental debt in addition to FCF to fund share repurchases is modestly aggressive. In early fiscal 2015, the company's Board of Directors raised its quarterly dividend 17% to \$0.28/share, after increasing it 20% in the prior year, and upped its share repurchase authorization by \$350 million. Fitch would expect Brinker to take a more conservative stance towards share buybacks if operating performance weakens.

Brand Relevance and Market Share at Chili's

Chili's Bar & Grill (Chili's), a leader in U.S. casual dining with about \$4.9 billion of system-wide sales, makes up the bulk of Brinker's operations. Consequently, the ability of the brand to stay relevant and maintain market share in a highly competitive industry is key. At Dec. 24, 2014, Brinker operated or franchised 1,634 units, of which 1,585 were Chili's and 49 Maggiano's Little Italy restaurants. Approximately 20% or 319 of Brinker's restaurants were in foreign markets, up from 14% at the end of fiscal 2010. Foreign currency translation has not had a material impact on Brinker's earnings.

Comparable restaurant sales at Chili's have been positive for five consecutive quarters with traffic trends at company-owned units showing consistent improvement and being positive for two straight quarters. During the 26-week period ended Dec. 24, 2014, comparable sales at company-owned Chili's increased 3.3% due to 1.8% pricing, 1% traffic, and 0.5% mix shift. Comparable sales at franchised Chili's rose 2.1%, due to a 3.3% increase at domestic locations and negative 0.6% comparable sales for international units.

According to Brinker, Chili's is in its fourth consecutive year of outperforming casual dining peers. Fitch believes higher-quality food with fresh ingredients, effective marketing, on-going variety on its 2-for-\$20 value offering, and the rollout of interactive tabletop devices are helping Chili's to stay relevant and drive traffic. Chili's Fresh Mex platform and Craft Burgers are examples of high quality food with fresh ingredients. The upcoming launch of a loyalty program at Chili's could help further improve traffic.

Fitch is concerned that traffic for the U.S. casual dining segment has been in a secular decline but notes that traffic was positive during two of the last three months. Fitch attributes the recent improvement in part to easier comparisons caused by severe winter weather but believes trends could be sustained over the near- to intermediate-term due to higher real disposable income resulting from increasing hourly wages and lower gas prices.

Achievable Revenue and Margin Goals

Fitch views Brinker's long-term goal of 3%-5% revenue, inclusive of 2%-3% comparable restaurant sales growth, and about 2% new unit growth as achievable. Management's 1%-2% comparable sales guidance for 2015 appears cautious given the first-half performance discussed above. Fitch's base case projections for 2015 and 2016 assume comparable sales at the high end of Brinker's long-term goal. This sales assumption is supported by Fitch's belief that pricing will be in line with Brinker's historical 1%-1.5% range, mix will be a modest benefit, and that traffic will improve in U.S. casual dining as mentioned above.

Expansion is expected to be mainly overseas and via franchisees and joint ventures. At Dec. 24, 2014, 54% of Brinker's units were company-operated and 46% were franchised. Six franchisees operate approximately 80% of Chili's domestic franchise units. Brinker's international franchise system is more diverse.

Brinker is on track to achieve its 2010 goal of 400 basis points (bps) of operating margin improvement to 10.4% from 6.4% in fiscal 2010. The company reported an operating margin of 10% in fiscal 2014. Margin expansion is being driven by kitchen upgrades, labor efficiency, and higher-margin menu items.

In terms of restaurant-level profitability, Brinker expects its company restaurant margin to expand 25-50 bps to 17.2%-17.4% excluding depreciation and amortization expense in 2015. Fitch views this guidance as realistic given same store sales (SSS) trends and the 20 bps of restaurant margin expansion realized in the first half of the fiscal year. Brinker is anticipating about 1% of commodity inflation in fiscal 2015, with pressures easing in the fourth fiscal quarter, after experiencing about 1% in 2014.

Increased Liquidity and Limited Near-term Maturities

At Dec. 24, 2014, Brinker had \$165 million of liquidity consisting of \$78 million of cash and \$87 million of availability under a \$250 million revolver. Brinker refinanced its revolver and \$175 million outstanding term loan with a \$750 million revolving credit facility in March 2015. The upsized revolver, which expires March 12, 2020, along with Brinker's FCF generation supports on-going liquidity. LTM FCF totaled \$137 million, as mentioned previously.

Significant upcoming maturities include \$250 million of 2.6% notes due May 15, 2018 and \$300 million of 3.875% notes maturing May 15, 2023. Debt reduction is not anticipated so Fitch expects these obligations to eventually be refinanced.

Good Cushion Under Fairly Restrictive Covenants

Brinker's credit facility includes a minimum adjusted coverage ratio test of 1.5x and a maximum debt-to-cash flow limitation of 3.5x. Maximum debt-to-cash flow is defined as consolidated debt plus 6x rent divided by EBITDA plus rent. Minimum adjusted interest coverage is defined as EBIT plus rent divided by interest expense plus rent. The firm has ample cushion under these covenants. Fitch estimates that adjusted interest coverage was 3.2x and debt-to-cash flow was 2.8x for the LTM period ended Dec. 24, 2014.

Brinker's 2018 and 2023 notes include a Change of Control Triggering Event provision. Negative covenants for the notes restrict Brinker's ability to incur debt secured by liens and to engage in sale lease-back transactions. At Dec. 24, 2014, Brinker owned the land and building for 189 of its 888 company restaurants.

KEY ASSUMPTIONS:

--Comparable restaurant sales in line with Brinker's 2%-3% long-term annual goal, due to flat-to-slightly positive traffic and the maintenance of market share by Chili's;
--Stable-to-modestly higher margins;
--FCF continues to be at least \$100 million annually;
--Total adjusted debt-to-operating EBITDAR of 3.2x in fiscal 2015 and 3.3x in fiscal 2016.

RATING SENSITIVITIES:

Future developments that may, individually or collectively, lead to a positive rating action include:

--Total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rent-to-operating EBITDA plus gross rent) maintained below 3x;

--Comparable restaurant sales that are consistently positive and above that of peers at Chili's, due to increased traffic;

--Increased U.S. casual dining market share at Chili's;

--Significantly higher than expected operating income growth and margin expansion.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Total adjusted debt-to-operating EBITDAR sustained above 3.5x;

--Persistently negative comparable restaurant sales, due to declining traffic and market share, at Chili's, and margin declines;

--Meaningfully lower than expected FCF due to lower operating income, higher capital expenditures, and/or a more aggressive dividend policy;

--Debt-financed share repurchases concurrent with weakening operating trends.

Fitch affirms Brinker's ratings as follows:

--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.

Fitch has assigned the following rating:

--Bank credit facility of 'BBB-'.

The Rating Outlook is Stable.