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MOODYS.COM 18 AUGUST 2016 NEWS & ANALYSIS Corporates 2 » Ruby Tuesday Will Close Underperforming Restaurants in Planned Turnaround, a Credit Positive » Cintas' Planned Acquisition of G&K Is Credit Negative » Xylem's Planned Acquisition of Sensus Is Credit Negative » Deutsche Wohnen's Acquisition of Nursing Facilities Is Credit Negative » Korean Builders' Declining Overseas Orders Are Credit Negative » Measures to Cool Rising Property Prices in Nanjing and Suzhou, China, Are Credit Negative for Developers Infrastructure 10 » Korean Government's Temporary Tariff Cut Is Credit Negative for KEPCO Banks 12 » Bulgarian Banks' Asset Quality Review and Stress Test Results Are Credit Positive Sovereigns 15 » Guatemala's Tax Reform Proposal Is Credit Positive » Botswana's Energy Regulatory Bill Supports Increased Electricity Supply, a Credit Positive US Public Finance 18 » Paterson, New Jersey, Passes Levy to Prevent Immediate Cash Shortage, a Credit Positive » US State Highway Revenue Bonds Benefit from Record Gasoline Consumption RECENTLY IN CREDIT OUTLOOK » Articles in Last Monday’s Credit Outlook 22 » Go to Last Monday’s Credit Outlook Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases. NEWS & ANALYSIS Credit implications of current events 2 MOODY’S CREDIT OUTLOOK 18 AUGUST 2016 Corporates Ruby Tuesday Will Close Underperforming Restaurants in Planned Turnaround, a Credit Positive Last Thursday, Ruby Tuesday Inc. (B3 stable) announced that it will close 95 underperforming restaurants of its 646 company-operated restaurants as of 31 May 2016, as part of an initiative to turn around negative same-restaurant sales (SRS) and traffic trends and improve profitability, a credit positive. The company plans to improve its food and beverage offering, focus on its Garden Bar, and improve the overall restaurant experience. The company expects that closing the 95 underperforming restaurants will improve EBITDA by $12-$14 million annually. The cost of closing the restaurants will be $72-$81 million, with $30-$37 million of cash charges related to store closures, lease terminations and other charges. The company expects to offset cash charges with $35-$45 million of proceeds from the sale of owned properties. Casual restaurants such as Ruby Tuesday have faced intense competition from other casual restaurants as well as from the quick-service restaurant (QSR) segment. QSRs have introduced value meals (two items for $2, or four items for $4, etc.) and have been able to offer lengthy promotions because of low commodity costs, weakening casual restaurants’ SRS results and traffic trends. Ruby Tuesday reported a 3.7% decline in SRS for the fourth quarter and 1.4% for the fiscal year that ended 31 May 2016. We expect Ruby Tuesday to benefit from the proposed changes through a modest level of improved traffic and SRS. We have seen other restaurant companies such as El Pollo Loco (unrated) and California Pizza Kitchen (B3 positive) make changes to their menu and refresh restaurant interiors that have improved SRS trends. Ruby Tuesday has had positive feedback on menu changes, which include removing some unpopular items and adding more value items, and new restaurant looks in small tests in several markets. Pro forma debt/EBTIDA reflecting the EBITDA improvement from the store closings only, is about 4.5x, versus 4.8x as of 31 May. Despite the improved leverage, which meets our quantitative guidance for a higher rating, Ruby Tuesday will need to show it can reverse its negative SRS and traffic trends before we would consider an upgrade for the company. The biggest risk for Ruby Tuesday is if the planned changes do not generate additional traffic from new customers or if existing customers reduce visits because they do not like the menu changes, thereby continuing or worsening the negative traffic trends. With no material maturities before its $212.5 million 7.625% senior notes due in May 2020 (the company’s undrawn $50 million revolver expires in December 2017), we believe that Ruby Tuesday has time to institute the changes and generate increased traffic. We calculate that the company generates $30-$40 million of free cash flow that will allow it to begin to roll out the menu changes and some model refreshes in the next few quarters. Ruby Tuesday’s B3 corporate family rating reflects its weak operating performance in part driven by negative SRS and traffic trends that have resulted in modest interest coverage and relatively high leverage. For the 12-month period that ended 31 May 2016, pro forma EBIT coverage of interest expense was modest at about 1.2x, while we consider leverage relative to peers high at around 4.8x. The company’s high level of brand awareness, material scale, strategic focus on advertising, cost saving initiatives and adequate liquidity support its rating