Investing.com -- Today, Moody’s Ratings lowered the rating of Papa John’s International (NASDAQ: PZZA ), Inc.’s senior unsecured notes to B2 from B1. Simultaneously, Moody’s confirmed the Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating (PDR) for Papa John’s. The SGL-2 speculative grade liquidity rating (SGL) for Papa John’s remains the same, and the rating outlook is steady.
The downgrade of Papa John’s senior unsecured notes is due to an increase in the amount of secured debt in the company’s capital structure. Papa John’s has extended its $600 million revolving credit facility’s expiration date to 2030 and has taken on a new $200 million senior secured term loan, which is unrated. The new loan was used to pay off part of the outstanding borrowings from the revolving credit facility. Although this transaction did not change the company’s leverage, it extended the maturity profile of Papa John’s and improved its liquidity through higher availability from the revolving credit facility. However, the priority of secured debt obligations compared to the senior unsecured notes has also grown significantly. As of March 26, 2025, the revolving credit facility had approximately $441 million of borrowing capacity remaining, with $159 million of borrowings still outstanding.
Papa John’s Ba3 CFR is due to its strong brand recognition, its large number of units, and its solid credit metrics, despite recent weaker performance. The company’s debt/EBITDA ratio as of Dec. 29, 2024, was about 4.0x, and its EBIT/Interest ratio was 2.5x. Papa John’s credit profile is limited by its relatively small dollar revenue scale, narrow brand and product offering, and weak cash flow metrics, mostly due to its large dividend and capital expenditures. While most of Papa John’s restaurant units are franchised, most of its reported revenue comes from company-owned restaurants and commissaries, which are its main areas of operating risk. However, Papa John’s commissary business operates on a cost plus fixed margin basis, which reduces the segment’s exposure to rising costs. The company’s liquidity is strong and is expected to be supported by cash balances, improving free cash flow, and significant availability from the revolving credit facility over the next 12 months.
The stable outlook is based on the expectation that Papa John’s will maintain steady metrics as it invests in growth initiatives while reducing debt. The company is also expected to maintain good liquidity, supported by cash balances, improving free cash flow, and excess availability from the revolving credit facility over the next 12 months.
Factors that could lead to an upgrade in ratings include consistent positive revenue and earnings growth, with positive same store sales driven by both traffic and check. An upgrade would also require increased scale, brand and product diversification, very good liquidity, including solid positive free cash flow, and maintaining a conservative and clearly articulated financial strategy, which prioritizes debt reduction. Specific metrics include debt to EBITDA sustained below 2.5x and EBIT to interest coverage sustained over 4.0x.
Factors that could lead to a downgrade include an inability to improve operating performance, more aggressive financial strategies, including debt financed share repurchases or material asset sales proceeds not being utilized to reduce debt, or if liquidity deteriorates, including continued negative free cash flow. Specific metrics include Moody’s debt to EBITDA sustained above 4.25x or EBIT to interest coverage below 2.5x.
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