Yum Brands, the owner of fast food franchises KFC, Taco Bell and Pizza Hut, moved to break the deadlock in high-yield bond markets on Monday, becoming the first junk-rated company to seek fresh capital from investors since coronavirus brought issuance to a standstill in early March.
Yum launched the new $500m deal to bolster its balance sheet in the face of a prolonged economic shutdown that has prevented many customers from eating out.
About 7,000 Yum restaurants had closed by the middle of this month as a result of the pandemic, including 1,000 Pizza Hut Express units in the US and 900 KFCs in the UK. Other outlets have been limited to drive-through, delivery and takeaway.
The Kentucky-based group has more than 50,000 outlets globally, nearly all of them operated by independent franchisees and licensees.
While investment-grade companies have been issuing debt in record amounts this month, investors have refrained from providing new money to lower-quality issuers, fearing rising defaults as cash flows take a hit. Yum is the first high-yield bond issuer to come to market in the US since March 4.
“We’ll see how long this window stays open,” said John McClain, a portfolio manager at Diamond Hill Capital Management. “We certainly do not think we are out of the storm.”
Yum’s move is part of a broader dash for cash from corporate treasurers, who have been willing to pay higher borrowing costs to raise funds to see them through the worsening economic downturn.
The fast food group had already acted this month to improve its cash position, halting a $2bn share buyback programme and tapping lenders for $525m under a revolving credit facility. It said on March 18 it had “further increased its cash position as a precautionary measure in order to preserve financial flexibility”.
Yum warned that like-for-like sales in the current quarter will decline in a “mid- to high-single digit” percentage range and forecast a bigger drop in the three months to the end of June. It cited an “increasing number of markets” impacted by social distancing measures introduced around the world to contain the spread of Covid-19, but was unable to quantify the financial effects.
The company is expected to pay a coupon of close to 9 per cent for the five-year debt, according to people familiar with the deal — a significant increase on the 4.75 per cent it paid when it sold a 10-year bond last year.
The average yield in the US junk bond market had risen from a six-year low of 5.1 per cent in January to 9.5 per cent on Friday, according to data from Ice Data Services, after moderating last week following central bank support.
“It’s not about cost of capital at the moment, it’s about access. Every corporate issuer should be borrowing at this point if they can,” said Mr McClain.