Moody’s Downgrades Family Restaurants’ Notes

Moody’s Investors Service Inc. on Monday said it had downgraded Family Restaurants Inc.’s 9.75% senior notes that come due in 2002 to Caa from B2.

Moody’s said the downgrade was prompted by operating losses at the privately held, Irvine-based restaurant operator and the company’s decision to use bank borrowings to finance an Aug. 1, 1995, interest payment.

The new debt rating reflects the company’s high leverage, steep sales declines at Family Restaurants’ Chi-Chi’s chain, limited liquidity, noncompliance with certain bank financial covenants and the structural subordination of the notes to bank debt, Moody’s said.

Earlier this month, Family Restaurants bonds plunged after the operator reported a second-quarter loss and weak sales. Family Restaurants said second-quarter earnings before interest depreciation and taxes fell 52% to $13.6 million, and that sales at restaurants open for at least a year fell 5.9%.

The restaurant company, which made an Aug. 1 interest payment on its 9.75% senior notes, is currently in violation of its bank credit agreement, according to a recent report by Sheila O’Connell, an analyst at Duff & Phelps Investment Research.

Family Restaurants, formerly known as Restaurant Enterprises Group Inc., successfully exited bankruptcy proceedings in early 1994 after restructuring a heavy debt load left over from a leveraged buyout in the 1980s. At the time, the company said that a recapitalization plan approved by a U.S. bankruptcy judge in Santa Ana would help make the chain more competitive.

Family Restaurants operates about 700 restaurants in 33 states, including the Chi-Chi’s, El Torito, Carrows and Coco’s chains.