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S&P downgrades Fairway

Standard & Poor's Ratings Services has lowered its corporate credit rating on Fairway Group Holdings to 'CCC+' from 'B-', citing “persistent underperformance” and the possibility the company breaches loan covenants in coming months. The outlook is negative, S&P added.

According to S&P, a CCC rating indicates businesses that are “currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.”

The ratings follow Fairway’s report last week of a $12 million loss and continued decline in same-store sales during its fiscal second quarter. Although the company highlighted encouraging trends in EBITDA, it acknowledged that its current debt ratios could trigger covenant breach and necessitate an equity cure in the fourth quarter.

Fairway also said it was also on the hunt for an additional capital infusion, saying current constraints on spending were preventing the company from investing in marketing at the level it requires.

“The downgrade reflects our belief that Fairway needs to undergo a fundamental change in its capital structure to operate the business effectively in coming years," S&P credit analyst Diya Iyer said in a release. "Management is currently unable to commit funds for direct marketing or discount on a sustained basis because of covenant constraints. We believe the likelihood of the capital structure improving absent a successful restructuring of its debt burden is low given our expectations for operating performance."

S&P also lowered our issue-level ratings on Fairway's $40 million 2017 revolver and $275 million 2018 term loan to 'CCC+' from 'B-'. The '4' recovery rating reflects the expectation for average recovery in the event of payment default in the upper half of the 30% to 50% range.


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“The negative outlook reflects our view that Fairway will continue to find it challenging to outgrow its current capital structure given its new store growth plans and limited funding for strategies to restore positive comparable-store sales,” S&P added. “As a result, we remain cautious on the company's ability to avoid a covenant default scenario absent a covenant waiver under its credit facilities or a sizable new investor infusion.”

Separately this week, equity analyst John Heinbockel of Guggenheim Securities in a note to clients said he expected Fairway could announce new financing shortly, which could provide a needed jolt for upcoming holiday season sales.

“We would expect progress fairly soon,” he wrote. “Such an infusion would give the company more room to invest in promotions during the important holiday season. The exact source of this infusion is unclear, but we would anticipate an amount large enough to represent a permanent solution.”

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