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Steak n Shake Inc. Downgraded To ‘CCC+’ On Expected Performance And Strained Capital Structure; Outlook Negative

          NEW YORK (S&P Global Ratings) Jan. 25, 2018--S&P Global Ratings today lowered its corporate credit rating on the Indianapolis-based quick-service restaurant operator and franchisor Steak n Shake Inc. to 'CCC+' from 'B-'. The outlook is negative. At the same time, we lowered the issue-level rating on the company's secured credit facility to 'CCC+' from 'B'. The recovery rating on the facility is '3', indicating our expectation for meaningful (50% to 70%; rounded estimate: 60%) recovery for lenders in the event of payment default or bankruptcy. The downgrade reflects our view of Steak n Shake's capital structure as potentially unsustainable, driven by its weak operating performance and our view that increased restaurant industry competition will further pressure profitability and cash flow generation. 
          Despite the company's low-price menu mix that has historically appealed to value-conscious customers, we think customer traffic in 2017 has remained negative because of competition, a trend we think will continue. We also believe pressures on operating costs such as increased labor, commodity, and restaurant operating expenses will persist and lead to lower EBITDA margins.
          Moreover, we think flat to modestly negative free operating cash flow generation and low reported pricing indications of the company's term loan, which matures in 2021, could be a near-term incentive for debt repurchases below par. The negative outlook reflects our expectation that operating performance will remain soft given an expected decline in customer traffic and further restaurant cost pressures. This leads us to view the company's capital structure as potentially unsustainable. We could lower the rating if we envision a specific default scenario over the next 12 months.
          This could occur if sharper than expected declines in traffic results in lower operating results and significant negative free operating cash flow. We could also lower the rating if we became convinced the company will pursue a distressed exchange offer for its term loan facility. Although unlikely, we could raise the rating if the company demonstrates improved and consistent performance, with sales gains in the low-single-digit percentage range, along with EBITDA margin expansion of about 200 basis points above our expectation. This could happen if management offers a menu that is more appealing to its customersand operating cost pressures subside. Under this scenario, free operating cash flow would be meaningfully positive on a sustained basis, adjusted leverage would be 6x or less, and we would believe that the risk of a distressed exchange or proactive debt restructuring is minimal.