Moody's cuts Franchise Group

Moody's Investors Service said it downgraded Franchise Group, Inc.'s ratings, including its corporate family rating to B2 from B1, its probability of default rating to B2-PD from B1-PD, the senior secured first-lien term loans to B2 from B1 and senior secured second-lien term loan to Caa1 from B3.

Concurrently, the agency placed all ratings on review for further downgrade. Franchise Group's SGL-3 speculative grade liquidity rating is unchanged. The outlook has changed to ratings under review from negative.

“The downgrades reflect Franchise Group's weaker-than-expected operating performance and credit metrics resulting from the ongoing challenges in its home furnishing businesses. Comparable sales at Buddy's, Badcock and American Freight declined 3.5%, 18.9% and 4.1%, respectively, in the first quarter of 2023. Total revenue declined 2.7% in the quarter, while consolidated adjusted EBITDA, as calculated by management, fell to $66 million from $112 million in the first quarter last year,” Moody’s said in a press release.

The review for downgrade reflects governance considerations related to a potential change in ownership of Franchise Group given the pending acquisition of the company. Last week, Franchise Group announced it agreed to be acquired by a consortium led by its management group in partnership with B. Riley Financial, Inc. and Irradiant Partners, which will roll over their shares and use third-party debt to finance the deal.

The deal is expected to close in the second half of 2023, subject to customary closing conditions including expiration or termination of the applicable waiting period and stockholder approvals.

“The review for downgrade will focus on Franchise Group's capital structure and leverage profile post completion of its leveraged buyout, financial policy under new ownership, as well as its ability to improve operating performance and transition the Badcock customer financing business to a third party in the very near term, and improve liquidity, including a turn to positive free cash flow,” Moody’s said.

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