OREANDA-NEWS. S&P Global Ratings today affirmed its 'B' corporate credit rating on Houston-based restaurant operator Landry's Inc. The outlook is stable.

At the same time, we assigned a 'B+' issue-level rating and '2' recovery rating to the proposed $1.5 billion first-lien senior secured credit facility, which consists of a $200 million cash revolver due 2021 and $1.3 billion first lien term loan due 2023. The '2' recovery rating reflects our expectation for substantial recovery in the event of default, at the higher end of the 70% to 90% range. We also assigned a 'CCC+' issue-level and '6' recovery ratings to the company's $575 million senior unsecured notes due 2024. The '6' recovery rating indicates our expectation for negligible recovery (0% to 10%).

The affirmation reflects our view that Landry's will maintain debt leverage in the 5.0x range in the next year, despite benefits from the proposed refinancing that will lower the company's interest costs and provide it with cash flow flexibility to repay additional debt. We believe performance trends will remain volatile over the near term and do not anticipate significant improvement in credit metrics based on our forecast. We expect leverage to decline to the 5x area by year-end 2017 from modest profit growth and use of excess cash flows to reduce debt beyond scheduled amortization. In addition, though we view the risk of debt-funded payouts as low, we believe the company could pursue debt-funded acquisition if an accretive opportunity in the market presents, leading to higher leverage.

The stable outlook incorporates our expectation that the company's diversified restaurant portfolio, recognized brand name and loyalty program will support almost stable performance trends in the upcoming year.

We could consider a negative rating action if competitive pressures in the restaurant industry hurt the company's guest traffic and profitability, causing leverage to increase to the high-6x area on a sustained basis. Leverage could increase to this threshold if the company pursues debt-financed dividend or makes a debt-financed acquisition and we believe that leverage would stay elevated at that level. We calculate that about $400 million of incremental debt and flat EBITDA in 2017 would lead to debt leverage increasing to the downgrade threshold. Leverage could also reach this level if EBITDA declines about 15% from current levels and debt remains constant.

We could consider an upgrade if the company continues to reduce its outstanding debt which together with improving profitability leads to leverage sustained below the 5x area and our belief for sustainable positive same-store sales. We could consider an upgrade if we believe there is low likelihood for material debt-funded dividends or acquisitions.