In the European high-yield casual dining sector, Wagamama’s strong performance and significant deleveraging in the past year mean its credit metrics outpace peers PizzaExpress and Stonegate Pub Company, according to a new report by rating agency Moody’s.

The report, titled “European Restaurant Industry - Relative Comparison: Performance and Credit Metrics of High-Yield European Restaurant Companies”, compares the credit profiles of high-yield European restaurant companies following their most recent earnings season.

Wagamama’s leverage fell to 5.3x in FY2016 from 6.7x at year-end 2015 due to a strong performance, and Moody’s forecasts a further drop to slightly below 5.0x in the next 12 months. Pizza Express has slowed its pace of deleveraging with leverage unlikely to fall below 6.5x. Stonegate’s leverage has increased due to a debt-funded acquisition.

Conversely, Pizza Express’ margins remain strongest, due to its scale and because its pizza/pasta-based offering benefits from lower ingredient costs and simple kitchen/preparation. However, its margins have suffered comparatively in the past 12 months, while Wagamama’s have improved.

“We expect continued pressure on margins for all companies due to fierce competition, and for UK companies also as a result of rising labor costs following the introduction of the national living wage

and potential food cost inflation over time due to a weaker currency following the UK referendum,” said Emmanuel Savoye, a Moody’s Assistant Vice President – Analyst and author of the report.

The report said that retained cash flow generation is adequate across the sector. Overall liquidity is also adequate for most issuers, with no maturities due in the next 18 months.

It said: “European casual dining sector fundamentals remain supported by low inflation, increased disposable incomes, the growing trend of eating out and the increased market share of restaurant chains versus independent restaurants. However, market conditions are more challenging in 2016-17 and effort will be required to defend margins while achieving stable or positive like-for-like sales growth.”