DBRS Confirms Cara Operations at B, Stable, Following Termination of Acquisition Agreement with Prime Restaurants Inc.

DBRS has today confirmed its Issuer Rating of B for Cara Operations Limited (Cara or the Company) and its B rating on Cara’s Senior Secured Second-Lien Notes, based on a RR4 recovery rating. The trends are Stable. This action removes the ratings from Under Review with Developing Implications, where they were placed on October 18, 2011, following the Company’s announcement that it had made a bid to enter a support agreement with Prime Restaurants Inc. (Prime) to acquire all of the outstanding shares of Prime. Cara subsequently terminated its acquisition agreement with Prime following a rival agreement from Fairfax Financial Holdings, thereby eliminating any potential for changes to Cara’s business risk and financial profile that may have resulted from the acquisition.

That said, DBRS notes that there has been some softness in Cara’s operating results over the past year, due primarily to the impact of the Company’s planned reduction in its conversion strategy (transitioning corporate owned stores to franchise locations) and a continuing soft consumer environment. As such, DBRS believes that Cara will require adequate financial flexibility to respond to the increasingly competitive Canadian restaurant landscape and challenging economic environment, while pursuing its plan for further growth. Cara’s inherently positive free cash flow generating capacity should provide it with the ability to maintain its financial profile. Therefore, DBRS believes that Cara remains best positioned in its current rating category for the time being. However, further deterioration in the Company’s credit metrics caused by weaker-than-expected operating performance and/or aggressive financial management may result in a negative rating action.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Merchandising Industry and DBRS Criteria: Rating Leveraged Finance, which can be found on our website under Methodologies.