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Puerto Rico's Burger King Franchisee Refinances

NEW YORK (The Deal) -- Private equity-backed Restaurant Holding Co. LLC has launched a refinancing of its $205 million in senior secured debt as the sole Burger King franchisee in Puerto Rico continues to face tight covenants throughout its debt structure.

Faced with declining earnings and a weak economy in Puerto Rico, Restaurant Holding launched the refinancing on Jan. 28 and set a lender call for Thursday, Jan. 30, according to data provider Bloomberg News.

Restaurant Holding owns Caribbean Restaurants LLC, which is the only Burger King franchisee on the island. Owned by New York PE firm Castle Harlan Inc., Restaurant Holding wants to refinance its $205 million in senior secured debt with a $140 million five-year term loan; a $50 million five-and-a-half-year second-lien term loan; and a $15 million revolver. Jefferies Group Inc. is the bookrunner, according to the Bloomberg News data.

In an interview Wednesday Moody's Investors Service Inc. analyst Peter J. Trombetta said that during the lender call, more details will come out about the refinancing.

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"They will talk to the potential lenders or existing lenders and tell them what the company is seeking and what kind of terms they are looking to get," he said.

Restaurant Holding currently has a $178 million senior secured term loan and a $22.5 million senior secured revolver led by administrative agent Jefferies Group.

The current debt is priced at Libor plus 750 basis points, with a 150-basis point floor on Libor. The term loan matures on Feb. 17, 2017, and the revolver comes due on Aug. 17, 2016, according to Bloomberg.

Trombetta said that it's hard to say if the refinancing can get done or not.

"The lenders have to look at this and decide whether they believe in the management strategy going forward," he noted. "If it's a new lender group, they will come into the relationship with expectations on what might happen over the next few years."

Since the company's refinancing plans include the issuance of second-lien debt, Restaurant Holding could be facing higher interest rates.

There isn't any pricing set for the new loans yet, but "when you introduce a second-lien tranche, it's safe to say that the costs will go up because second-lien lenders expect a higher return," Trombetta said. "It is likely that the covenant cushion issue that Restaurant Holding was facing in October is driving the refinancing. The company doesn't have any debt maturing in the near-term, so it's not a maturity issue."

Restaurant Holding "had a very slim covenant cushion in October that limited its ability to borrow on its revolver, so a refinancing could potentially give them more cushion and the ability to borrow more on their revolver," Trombetta continued. "This is assuming that the refinancing documentation would provide additional covenant cushion, which isn't part of the information that has been put out there yet."

On Oct. 17, Moody's warned that the company could be facing a violation of its total leverage covenant when it filed its second-quarter financial results on Oct. 31.

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