Yum! Brands reopened the high yield market today with an upsized USD 600m bond deal to bolster its liquidity. But the funding came at a hefty price—the new five-year bonds priced at 7.75%, roughly double what Yum’s longer-dated notes were yielding before the coronavirus went pandemic.

With many of Yum’s franchised restaurants shuttered due to quarantine measures, the deal provides much-needed cash to weather the impact of the shutdown, said four sources following the deal. But alongside the company’s recent revolver draw, they also significantly constrain free cash flow. 

The B1/B+ bond is the first successful high yield issue since the World Health Organization declared the global COVID-19 outbreak a pandemic on 12 March. Drugmaker Mallinckrodt launched a loan and bond offering on 11 March, but later pulled it from syndication amid turmoil in markets.

Since the selloff began on 21 February, the average yield for single-B bonds has widened 533bps to 10.31% as of Friday. When Yum circulated mid-to-high 8% area whispers for its new notes, investors had submitted reverse enquiry for more than half the USD 500m offering, said two sources.

At official talk of 7.75%-8%, the book was more than 10x oversubscribed, three of the sources said. The notes eventually priced at 7.75% and par, representing a nearly 200bps premium over the company’s longer-dated unsecured bonds—and a significant bump over its cost of funding before the pandemic.

Yum’s USD 350m 4.75% senior unsecured notes due 2030—its most heavily traded bonds—changed hands today at 91.875 to yield 5.851%, per MarketAxess. That’s up from trades at 87.5 last week, but down from at 107—for a yield of just 3.871%—on 4 March, before the pandemic was declared.

The issuer’s USD 1.05bn 5.25% senior guaranteed notes due 2026 traded today at 100.75 to yield 5.046%. That’s up from trades at 89.792 last week, but down from trades at 104.78 before the selloff, according to MarketAxess.

The new notes add USD 595m of cash to the balance sheet, bringing liquidity to USD 1.775bn through USD 50m of revolver availability and USD 1.725bn of pro forma cash. Yum drew USD 950m from its USD 1bn revolver earlier this month, using nearly half those funds to buy Habit Burger Grill.

The revolver draw and new notes increase Yum’s annual interest burden by roughly 24%, to USD 443m. Based on USD 2.12bn of consolidated financing EBTIDA as of 31 December, the company is now levered 5.7x, dropping to 4.9x net of cash.

Using that same EBITDA figure, the higher interest burden implies free cash flow of USD 1.361bn (11% of total debt), based on USD 121m of rent expense and USD 200m of capex. But how much Yum’s EBITDA will decline over the coming quarters is another question entirely, the sources noted.  

Revenue lockdown

Yum! has over 50,000 restaurants worldwide, primarily operating under the KFC, Pizza Hut and Taco Bell brands. Some 98% of these locations are operated by franchisees.

As of 24 March, some 7,000 of those restaurants have been closed as a result of the COVID-19 pandemic. Even with some stores pivoting to delivery, the company expects a mid-to-high single digit decline in same-store sales for 1Q20, and an even bigger impact during the following quarter.

In response to the financial distress the pandemic has sparked among franchisees, the company is allowing a grace period for certain near-term payments. It is also allowing US franchisees to defer all 2020 capital obligations for remodels and new unit development through the end of 2020.

The company also suspended its share repurchase program, which was set to run through June 2021. The USD 2bn initiative was announced in November 2019, but no stock repurchases have been made yet, according to deal documents.

The company’s stock last traded at USD 70.67 per share for a market cap of USD 21.259bn, up 3.12% from yesterday’s close. The equity hit a recent bottom of USD 55.41 per share on 23 March.

Goldman Sachs and Yum did not respond to requests for comment.

2020 Debtwire