Analyst gives 'junk' rating to chain's debt
The stock of Planet Hollywood, the theme restaurant chain partially owned and frequently promoted by Sylvester Stallone, Demi Moore and Arnold Schwarzenegger, dropped 5% Wednesday after Standard & Poor’s assigned “junk” ratings to its corporate credit and to a planned debt issue of $250 million.
Standard & Poor’s analyst Dawn Hu said in her March 17 report that “the themed restaurant sector carries even higher business risks than other restaurant formats.” Hu then cited the following risks specific to the 87 restaurants of Orlando, Fla.-based Planet Hollywood Intl.:
– a deterioration in same-store sales at units in operation more than 18 months;
– a negative cash flow for the foreseeable future as a result of heavy capital investments in nonrestaurant ventures;
– new competitive entries that offer no “substantial differentiation” from one chain to another.
The actual rating Hu gave Planet Hollywood’s planned offering of $250 million in senior subordinated notes, due in 2005, was CCC+. The cutoff from investment grade to the junk category, which Wall Street more often calls “speculative” or “high yield,” lies between BBB and BB.
A rating of CCC, according to Standard & Poor’s own criteria, is assigned to securities “commercially vulnerable to nonpayment.” Payment, moreover, is held to be “dependent on favorable business, financial or economic conditions.”
Planet Hollywood’s stock, which in the past year traded as high as $27.25, plunged to a low of $6.75 in January after the company reported an evaporation of fourth-quarter earnings. The stock has since risen with the market, only to slide to close at $11.44 on Wednesday.
Since its stock first fell, Planet Hollywood has announced such ambitious joint ventures as a 548-room hotel and restaurant complex in Times Square. Standard & Poor’s take on that venture, as well as “management’s plan to develop new restaurants with a music theme and to enter into movie theaters, gaming and lodging, and consumer products through joint ventures,” was indicated in the report’s opinion that “turning around the core restaurant business in itself will be a major challenge.”