Tacala LLC

The stable outlook reflects our expectation for relatively stable credit metrics over the next 12 months, with adjusted debt to EBITDA approaching the low-7.0x area on modest EBITDA base expansion through low-single-digit same-store sales growth and net unit growth. We also expect continued positive free operating cash flow generation and adequate sources of liquidity. We could lower the rating if operating performance is significantly below our expectations, driven by declining same-store sales or margin contraction because of elevated commodity prices or labor costs. This could happen if revenue growth is flat, and EBITDA margin contracts 400 basis points (bps) below our base-case forecast, leading to moderate negative free operating cash flow. Under this scenario, liquidity would become constrained, ultimately pressuring

...Single brand exposure and geographic concentration.Tacala LLC participates in the highly competitive quick-service restaurant (QSR) segment and is highly dependent on Taco Bell's product innovation strategies and marketing initiatives to drive sales. The company's geographic concentration in the South and Southeastern U.S. makes it vulnerable to regional economic conditions and also exposes it to competition from locally operated Mexican-QSRs popular in the area. Expectation for ongoing leveraged dividend payouts should performance allow. Tacala has performed well since its refinancing in Feb. 2018. Given its financial sponsor ownership, we expect the company will look to manage its capital structure consistent with this amount of very high leverage through periodic leveraging dividend transactions should performance and credit market conditions allow for it....

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