Oklahoma-based Sonic Corp. (SONC)announced recently that it is buying back $62.5 million worth of senior notes in a privately negotiated transaction. The extinguishment of the notes will benefit the company by approximately $5 million.

The fast food chain said that the repurchase of senior notes along with  regularly scheduled principal payments will improve the capital structure of the company. The availability of fund will also provide the company with additional financial flexibility, which we think Sonic will use to reduce its debt.

In the last 2 years, Sonic has made tremendous efforts to strengthen its balance sheet by using excess cash to reduce its financial obligation.  We believe Sonic has been successful in achieving its goal of reducing its long-term obligation, which has declined from $646.9 million as of August 31, 2009 to $529.9 million as of August 31, 2010.

After the completion of the transaction, Sonic will have $520 million as outstanding debt and more than $30 million of unrestricted cash available for general corporate purposes. The company also has $58 million remaining as additional scheduled principal payment for 2011.

Sonic’s primary competitors in the restaurant industry include McDonald’s Corp. (MCD) and Chipotle Mexican Grill Inc. (CMG).

Sonic currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

Sonic operates and franchises a chain of drive-in restaurants in the U.S. The company was founded in 1953 as Top Hat Drive-In and was given the name Sonic in 1959. The company’s restaurants offer made-to-order hamburgers and other sandwiches and feature certain signature items, such as footlong coney cheese dogs, hand-battered onion rings, tater tots and specialty soft drinks. As of August 31, 2010, Sonic had a total of 3,572 drive-ins in operation, including 3,117 franchise drive-ins and 455 company-owned drive-ins.

 
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