Fitch Affirms DineEquity's IDR at 'B'; Withdraws Rating

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed and withdrawn the 'B' Long-term Issuer Default Rating (IDR) for DineEquity, Inc. (DineEquity; NYSE: DIN). The rating withdrawal follows DineEquity's refinancing of its secured credit facility and 9.5% senior unsecured notes with a whole business securitization. At Sept. 30, 2014, DineEquity had approximately $1.4 billion of total debt.

KEY RATING DRIVERS

High Financial Leverage

DineEquity's credit metrics are in line with Fitch's forecast and are expected to remain reflective of a 'B' rated restaurant company over the near-term. For the latest 12-month (LTM) period ended Sept. 30, 2014, total adjusted debt-to-operating EBITDAR was 5.8, operating EBITDAR-to-interest plus rent was 1.9x and FFO fixed charge coverage was 1.7x.

Good Cash Flow Generation

DineEquity's cash flow is supported by the firm's 99% franchised system, which provides a steady source of royalty-based high-margin revenue and has minimal capital requirements. Cash flow will benefit from the firm's recent refinancing as management expects annual pre-tax interest savings to approximate $34 million. DineEquity revised its 2014 operating cash flow and FCF guidance upward as a result of the refinancing and management's improved same-restaurant sales (SRS) outlook, discussed below.

Shareholder Friendly Financial Strategy

DineEquity increased its quarterly dividend by 17% to $3.50 annually and availability under its share repurchase authorization to $100 million due to the interest savings resulting from its securitization transaction. The firm's stated financial strategy is to maximize the business in order to return significant FCF to shareholders. DineEquity's dividend payout as a percentage of earnings is one of the highest in the industry.

Significant Scale and Diversification

DineEquity benefits from the scale and diversification provided by its two national brands. At Dec. 31, 2013, DineEquity's system consisted of 3,631 restaurants, of which 2,011 were Applebee's Neighborhood Grill and Bar (Applebee's) and 1,620 were International House of Pancakes (IHOPs). Total system-wide sales approximated $7.4 billion with average annual restaurant sales for franchised units being about $2.4 million for Applebee's and $1.8 million for IHOP.

DineEquity is exploring the acquisition of a third non-competing brand to scale its shared services infrastructure and provide additional new unit development opportunities for existing franchisees. Management has indicated that nothing is imminent.

Same-Restaurant Sales

Applebee's domestic system-wide SRS increased 1.7% and 0.6% during the quarter and nine months ended Sept. 30, 2014, respectively. In each case a higher average check was partially offset by a decline in traffic. IHOP's domestic system-wide SRS rose 2.4% and 3.2% during the quarter and nine months ended Sept. 30, 2014, respectively. Traffic was slightly positive in the quarter, after being negative for the nine-month period.

For the full year, DineEquity projects that Applebee's SRS will be flat to 1%, versus the firm's prior expectations of between negative 2% and positive 1%. Management has guided for 2.5% to 3.5% for IHOP, an increase from its previous guidance of 1% to 2%. Sales are benefitting from menu innovation and effective marketing, which are helping to differentiate Applebee's and IHOP from the competition. Examples include Applebee's All You Can Eat Crosscut Ribs and IHOP's numerous holiday pancake varieties and Thanksgiving meals limited time offers.

Liquidity and Maturities

DineEquity's liquidity is adequate given the firm's FCF and limited near-term maturities. At Sept. 30, 2014, DineEquity had over $200 million of liquidity inclusive of $133 million of cash and availability under the firm's $75 million revolver which has been terminated. DineEquity's $1.3 billion of new securitized notes have a 30-year legal final maturity and a 7-year anticipated repayment date resulting in no upcoming maturities.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology; Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 2014);

--U.S. High Yield Food, Beverage, Restaurant, and Consumer Products Handbook (Event Risk: Merger and Acquisition Activity Continues to Dominate the Landscape) (August 2014)

--'U.S. Restaurant FAQ: Inquiring Minds Want to Know' (March 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

U.S. High Yield Food, Beverage, Restaurant, and Consumer Products Handbook (Event Risk: Merger and Acquisition Activity Continues to Dominate the Landscape)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749774

U.S. Restaurant FAQ: Inquiring Minds Want to Know (Highlights from First-Quarter 2014 Discussions with Investors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=741558

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=924515

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