OREANDA-NEWS. S&P Global Ratings affirmed its corporate credit rating on Los Angeles-based California Pizza Kitchen Inc. (CPK) at 'B-' and revised the outlook to stable from negative.

At the same time, we are assigning a 'B' issue-level rating to CPK's new senior secured first-lien credit facility, which consists of a $30 million revolver and $290 million term loan. The recovery rating is '2', indicating our expectations for substantial recovery in the event of default, at the low end of the 70% to 90% range. We also assigned a 'CCC' issue-level rating to CPK's new senior secured second-lien $75 million term loan. The recovery rating is '6', indicating our expectations for negligible (0% to 10%) recovery.

We will withdraw the ratings on existing credit facilities once the new facilities close.

"The rating reflects our view that CPK's recently completed comprehensive remodeling program that modernized both the decor and menu is slowly starting to gain traction with customers. Private equity sponsor Golden Gate Capital has owned CPK since 2011 and the company has been focusing on improving gross and EBITDA margins through cost-saving initiatives targeting food and labor, choosing attractive locations for new restaurants, investing in marketing, and gradually increasing menu pricing," said credit analyst Olya Naumova. "As a result, EBITDA margin expanded by 80 basis points (bps) to 17.6% in the first quarter of 2016 from 2015 levels and the FFO to debt ratio improved to 13.7%."

The stable outlook on CPK reflects sufficient covenant headroom under the refinanced capital structure as well as potential for gains under the company's restaurant and menu redevelopment plan. In our opinion, these initiatives give the company necessary flexibility to reposition its brand and continue its low-single-digit same-store sales expansion going forward.

We could lower our ratings if weaker-than-expected performance because of competition, poor traffic trends, and challenged cost controls result in negative free operating cash flows, less than adequate or weak liquidity, and tightening of covenant cushion to below 10%, all pointing to an unsustainable capital structure.

We could consider a positive rating action if the company expands same-store sales beyond our 2.5% expectation through successful price increases, profitable openings of new locations, and enhanced marketing strategies, in conjunction with gross and EBITDA margin expansion above 200 basis points through improved cost controls associated with the company's workforce. At that time, leverage would decline to below 5.0x on a sustained basis.