Yum Brands, owner of KFC fast food franchises, Taco Bell and Pizza Hut, decided to break the deadlock in the high-yield bond markets on Monday, becoming the first undesirable company to seek new capital from investors since the coronavirus issued the broadcast to a halt in early March.
Yum launched the new $ 500 million deal to strengthen its balance sheet in the face of an extended economic closure that has prevented many customers from eating out.
About 7,000 Yum restaurants had closed in the middle of this month due to the pandemic, including 1,000 Pizza Hut Express in the United States and 900 KFC in the United Kingdom. The other points of sale were limited to drive-thru service, delivery and take-out.
The Kentucky-based group has more than 50,000 locations worldwide, almost all of which are operated by independent franchisees and licensees.
While top quality companies are issuing record debts this month, investors have refrained from providing fresh money to lower quality issuers, fearing an increase in defaults as cash flows cash suffer. Yum is the first high-yield bond issuer to hit the U.S. market since March 4.
“We will see how long this window stays open,” said John McClain, portfolio manager at Diamond Hill Capital Management. “We certainly don’t think we are out of the storm.”
Yum’s decision is part of a broader dashboard for corporate treasurers’ cash, who have been willing to pay higher borrowing costs to raise funds to cope with the worsening economic downturn.
The fast food group had already acted this month to improve its cash flow, stopping a share buyback program of $ 2 billion and calling on lenders for $ 525 million under a credit facility renewable. He said on March 18 that he had “further increased his cash position as a precautionary measure to preserve financial flexibility”.
Yum warned that like-for-like sales in the current quarter would decline in the “medium to high single-digit” percentage range and expected a further decline in the three months to the end of June. He cited a “growing number of markets” forced to implement social distancing measures to contain the spread of Covid-19, but was unable to quantify the financial effects.
The company is expected to pay nearly 9% coupon for five-year debt, according to people familiar with the deal – a significant increase from the 4.75% it paid when it sold a bond to 10 years last year.
Average yield on the US junk bond market fell from a low of 5.1% in January to 9.5% on Friday, according to data from Ice Data Services, after moderation last week following support from the central bank.
“It’s not about cost of capital at the moment, it’s access. Every issuing company should borrow at this point if they can,” said McClain.