Fri 09/03/2021 08:51 AM
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Relevant Items:
Brinker International’s Debt Documents
Brinker International’s Covenants Tear Sheet

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Brinker International owns, operates and franchises the Chili’s Grill & Bar and Maggiano’s Little Italy restaurant brands. As of June 30, the end of the company’s 2021 fiscal year, it (a) owned 1,069 Chili’s restaurants, including five internationally, and 52 Maggiano’s restaurants and (b) franchised 525 Chili’s locations, including 365 internationally, and two domestic Maggiano’s locations.

After the onset of the Covid-19 pandemic, Brinker International obtained a series of covenant relief amendments that, among other changes, suspended the financial covenants under its revolving credit agreement from May 2020 until March 2021. During that period and through the rest of its 2021 fiscal year, the company repaid a significant amount of its outstanding revolving debt: As of June 24, 2020, the end of its 2020 fiscal year, the company had $473 million outstanding under its revolver, which has since been reduced to $171 million as of June 30, 2021.

In August 2021, the company replaced its $1 billion revolver (the “Old Revolver”), which would have matured Dec. 12, 2022, with a new $800 million revolver maturing Aug. 18, 2026 (the “New Revolver”). Unlike the Old Revolver, the New Revolver requires the company to pledge “Material Real Property” (defined as real property valued at $10 million or more) and certain equity and debt interests of its subsidiaries as collateral to secure the New Revolver once the company’s 2023 senior notes are repaid. Notably, this requirement to pledge additional collateral to the New Revolver would also apply to “Principal Property” (defined as all restaurant or related equipment and real property constituting all or part of any restaurant located within the U.S. or Canada), the granting of liens on which is subject to the liens covenants under the indentures governing the company’s 2023 notes and 2024 notes.

The company’s capital structure and historical debt and leverage metrics as of June 30, pro forma for the company’s entry into the new revolving credit facility in August, are shown below:


Additional Collateral Requirements Under New Revolver

The New Revolver requires Brinker, under certain circumstances, to pledge additional collateral - including certain material real property and debt and equity interests in the company’s subsidiaries - to the revolving lenders that was not required to be pledged under the terms of the Old Revolver.
Material Real Property

Section 6.12 under the New Revolver requires the company to mortgage any “owned real property having fair market value of $10,000,000 or more in the reasonable estimation of the Borrower (a “Material Real Property”)” of a loan party in favor of the revolving lenders, but this requirement is not triggered until “the date on which the notes issued pursuant to the 2023 Notes Indenture have been redeemed, repaid or otherwise defeased in full.” In addition, material real property that is required to be pledged pursuant to Section 6.12 (referred to in the credit agreement as “Mortgaged Property”) is expressly included in the credit agreement’s definition of Collateral.

Under the old revolving credit agreement, real property was not included in the definition of Collateral, and in fact, the old credit agreement expressly stated that in no event would “Principal Properties” (defined as all restaurant or related equipment and real property owned by Brinker or a subsidiary which constitutes all or part of a U.S. or Canadian restaurant) constitute Collateral. Under the New Revolver, however, Principal Properties are excluded from Collateral only while the 2023 notes remain outstanding.

Therefore, although the New Revolver is not currently secured by any Material Property, the company will be required to pledge its Material Real Property, which may include Principal Properties, as soon as the 2023 notes are paid off.
Pledged Equity, Pledged Debt

The new revolving credit agreement’s definition of Collateral also includes “Pledged Equity” and “Pledged Debt,” which refers to the company’s debt and equity interests in its subsidiaries, provided that - pursuant to the credit agreement’s definition of “Excluded Assets” - the Pledged Equity and Pledged Debt are temporarily excluded from Collateral while the 2023 notes are outstanding. Under the old revolving credit agreement, assets comprising the Pledged Equity and Pledged Debt were not required to be pledged as collateral.

Although the New Revolver is not currently secured by the Pledged Equity and Pledged Debt, the company will be required to pledge such property once the 2023 notes are repaid.
Other Covenant Conclusions

Financial covenants - The new revolving credit agreement contains a 4.5x net leverage ratio test (calculated net of up to $150 million of balance sheet cash), which was satisfied for the period ended June 30 on the basis of the company’s reported net leverage of 2.5x. As reflected in the below excerpt from the credit agreement, the 4.5x net leverage test will eventually step down to 4.0x. We assume that the step-down will occur in March 2022, though - because of the typographical error highlighted below - it is somewhat unclear whether that step-down was actually intended to occur in March 2022 or after December 2022.

Debt and liens - The revolving credit agreement does not permit the company to incur general-purpose first lien debt outside of the $629 million of available capacity under its revolver, which was fully accessible as of June 30. However, the credit agreement does permit the company to incur up to $500 million of unsecured, junior lien or subordinated debt, all of which may be structurally senior to the revolver and the notes to the extent incurred by nonguarantors (the 2023 notes do not appear to be guaranteed by the company’s subsidiaries).

The notes do not restrict the company from incurring debt but do limit the company and its subsidiaries from incurring liens on Principal Property. While liens baskets under the 2024 notes permit up to $627 million of general liens on Principal Property, there is no available general lien capacity under the 2023 notes. That said, although the new revolver is not currently secured by Principal Properties, the revolving credit agreement requires material real property valued at $10 million or more (which may include Principal Property) to be mortgaged in favor of the revolver once the 2023 notes are paid off, which mortgages would then be permitted by the general liens basket under the 2024 notes.

Restricted payments, investments - The new revolving credit agreement permits the company to make general restricted payments of $210 million per fiscal year (with $50 million of unused capacity permitted to be carried forward) and general investments of $100 million per fiscal year, in each case plus additional amounts under a 3.50x net leverage basket.

The notes do not restrict the company from making restricted payments or investments.

Prepayments, purchases of notes - Neither the revolver nor the notes restrict Brinker from prepaying other debt, so the company is not restricted from repurchasing the notes in the open market. Notably, the 2023 notes are subject to a T+35 bps make whole through maturity, and the 2024 notes are subject to a T+50 bps make whole until July 1, 2024.

--Julian Bulaon

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