Moody's cuts Denny's ratings

Moody's Investors Service said it lowered the 2007 senior notes of Denny's Corp. to Caa2 from Caa1 and the 2008 senior notes to Ca from Caa3.

At the present time, Moody's does not rate the $123 million first-lien secured revolving credit facility or the $40 million subordinated-lien term loan (both loans due in December 2004).

The outlook remains negative.

Moody's said the rating downgrade was prompted by Moody's belief that cash flow likely will not rise to self-sustaining levels within the medium term, even if initial indications of improved sales become a trend, and due to the expected challenges in refinancing the bank debt that matures in December 2004.

The company's weak operating performance, short-term liquidity challenges, and potential impairment in debt recovery constrain the ratings.

However, Moody's said the value of the "Denny's" trade name and ownership of the real estate for 247 stores benefit the company.

Moody's noted that for 12 months ending Sept. 24, lease adjusted leverage equaled 6.7 times compared to 5.4 times and 6.1 times at the end of 2002 and 2001, respectively. Restaurant margin fell to 11.4% in the third quarter of 2003 compared to 14.5% in the same period of 2002, as higher labor costs raised expenses and marketing initiatives failed to stimulate incremental revenue.

At the end of the Sept. 24 quarter, there was about $64 million of borrowing capacity on the bank facility pro forma for using the incremental $40 million term loan to pay down the revolving credit facility.

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