OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' Long-Term Issuer Default Rating (IDR) for Brinker International, Inc. (Brinker; NYSE: EAT). The Rating Outlook is Stable. A full list of ratings is at the end of this release.

At the end of the fiscal third quarter ended March 23, 2016, Brinker had $1.2 billion of total debt.

Brinker's ratings reflect Chili's Bar & Grill's (Chili's) top 3 market position in U.S. casual dining and healthy operating cash flow. Moreover, Brinker has proven an ability to grow comps, improve profitability, and generate strong free cash flow (FCF). However, should Fitch anticipate that total adjusted debt/EBITDAR could be sustained above 3.5x due to continued negative comps and margin pressures with no offsets from debt paydown or pullback on share buybacks, a negative rating action could occur.

KEY RATING DRIVERS

Chili's Comps, Brand Strength

Chili's represented 97% of Brinker's 1,647 restaurants at March 23, 2016; therefore, the strength of the brand is an important indicator of Brinker's credit profile. Brinker strives to keep the brand competitive and relevant in order to maintain share. However, system-wide comps have been negative for three straight quarters, declining 3.1% in the latest quarter. Fitch views an outsized exposure to oil-producing states which are experiencing economic weakness and the transition from direct marketing to the My Chili's Rewards loyalty program as key contributors.

Fitch believes Brinker has done a good job isolating challenges at Chili's. In order to reignite comp growth, Brinker is revamping its loyalty program, increasing marketing spend, enhancing value offerings; such as its current $10.99 Baby Back Rib Bonus 30-year anniversary promotion, and adding more culinary innovation. While gradual improvement is anticipated, comps could remain negative in fiscal 2017 given continued economic weakness in oil-producing states and the highly competitive restaurant environment.

Mid-3.0x Leverage Anticipated

Fitch projects total adjusted debt/EBITDAR remains in the mid-3.0x range for fiscal 2016 (ending June) and fiscal 2017, up from 3.2x at the end of fiscal 2015, due mainly to the debt-financed acquisition of franchisee, Pepper Dining Holding Corp, and modest comp declines. Brinker has also used modest incremental debt to help fund share buybacks, which averaged $260 million annually net of stock options exercised since fiscal 2012. Fitch anticipates Brinker would have to pull back on share buybacks if trends remain weak and potentially pay down some debt to maintain leverage at or under mid 3x.

FCF Provides Financial Flexibility

Brinker's significant FCF provides the company good financial flexibility. Fitch projects Brinker will generate about $225 million of FCF in fiscal 2016 and roughly $150 million in fiscal 2017. Capex is expected to approximate $110 million in fiscal 2016, down from $140 million in fiscal 2015, as reimaging is essentially complete, and dividends are projected to track Brinker's 40% of earnings payout target. Most of the company's FCF is expected to be used for share repurchases in fiscal 2016. However, Fitch would expect a more conservative stance toward share buybacks if comps remain weak.

KEY ASSUMPTIONS

Fitch's key assumptions within the agency's rating case for the issuer include:

--Comps decline 2% in fiscal 2016 and decline 1% in fiscal 2017, before returning to positive low single digits;

--Operating margin approximates 10.5% in fiscal 2016, declining to below 10% in fiscal 2017 and remains relatively stable thereafter;

--Total adjusted debt-to-operating EBITDAR in the mid 3x in fiscal 2016 and fiscal 2017;

--FCF approximates $225 million in fiscal 2016 and $150 million in fiscal 2017.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--Consistently positive comps at Chili's with traffic trends at least in line with the industry;

--Total adjusted debt/EBITDAR maintained below 3.0x.

Future developments that may, individually or collectively, lead to a negative rating action include:

--A lack of improvement in comps and higher than expected margin contraction;

--Capital allocation policies that are biased towards shareholders, despite weak operating performance and increased leverage;

--Total adjusted debt/EBITDAR sustained above 3.5x.

LIQUIDITY

At Dec. 23, 2015, Brinker had $71 million of cash and $179 million available under its $750 million revolver due to mature March 12, 2020. Fitch estimates that Brinker had $628 million drawn on its revolver and $122 million available at March 23, 2016. Brinker's nearest upcoming maturity is the $250 million 2.6% notes due 2018, which Fitch anticipates will be refinanced.

FULL LIST OF RATING ACTIONS

Fitch affirms Brinker's ratings as follows:

--Long-Term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank credit facility at 'BBB-'.

The Rating Outlook is Stable.