New Menu of Troubles at Landry’s

Restaurant chain, unable to file financials because of stock-option backdating issues, is told of acceleration by noteholders, ratings-service down...
Stephen TaubJuly 26, 2007

The backdating of stock options continues to have ramifications beyond restatements. In the case of Landry’s Restaurants, problems have cropped up with noteholders and ratings-service downgrades as well.

The Houston-based operator of seafood restaurants and steakhouses said that because it has been unable to file its 2006 annual report, a majority of holders of its $400 million in senior unsecured notes has declared the unpaid principal and accrued and unpaid interest to be due and payable immediately under the indenture.

The company said it is trying to refinance the 7.50-percent debt. However, it warned that due to the recent tightening of the credit markets, the terms of the refinancing may be less favorable then could have been obtained a few weeks earlier.

The company also said it is not in compliance with the $450 million credit agreement with Wachovia Bank, National Association, and other financial institutions.

In response to the announcement, Moody’s Investors Service and Standard & Poor’s lowered their credit ratings for the corporate family, senior secured, and speculative grade liquidity ratings of Landry’s.

Moody’s affirmed the company’s senior unsecured note rating, but placed all long-term ratings on review for possible downgrade. Moody’s said the downgrade of the corporate family rating to B2 from B1 was prompted by the announcement that a majority of bondholders is seeking immediate payment of principle and interest. It said the downgrade of the speculative grade liquidity rating “indicates weak liquidity, the company’s reliance on external sources of financing and the availability of that financing in Moody’s opinion is uncertain.”

Moody’s said the review for possible downgrade reflects the uncertainty regarding the company’s ability to successfully address the noteholders request for full payment of principle and accrued interest as requested by the trustee, its success in seeking a waiver from its current bank group regarding the current default under the bank agreement due to the acceleration of the notes, and its inability to provide audited and reviewed financial statements to the SEC, its bank group, and bondholders in a timely manner.

S&P lowered its ratings on Landry’s corporate credit rating to CCC from B-plus. In addition, the company’s ratings remain on CreditWatch with negative implications, where Landry’s had been placed on March 16 because of the failure to file financial reports. S&P changed its CreditWatch listing to “developing.”

“The downgrade reflects the company’s need to seek new financing to fund the accelerated redemption of the unpaid principal and accrued interest on its $400 million 7.50% senior unsecured notes due 2014,” said credit S&P analyst Charles Pinson-Rose. The ratings service also said that the downgrade follows the recent announcement that holders of notes at Golden Nugget Inc., Landry’s subsidiary, are accelerating payment as a result of Landry’s financial reporting delay.

“Standard & Poor’s will review the rating once the company’s financing plans are announced,” it added, warning that it could lower ratings if the company is unable to obtain new financing to fund the redemption.

In March, Landry’s announced that an internal review had turned up incorrect measurement dates used for some stock-option grants, and said it would restate results. It said no evidence of intentional backdating or other wrongdoing had been uncovered, but warned that it expects to be the target of an informal inquiry by the Securities and Exchange Commission.