McDonald’s Bonds Tie Higher-Rated IBM Record: Corporate Finance
The world’s biggest restaurant chain issued $400 million of 1.875 percent, seven-year debt yesterday to equal the coupon higher-rated International Business Machines Corp. paid on $600 million of similar-maturity bonds May 8, according to data compiled by Bloomberg. The two-part sale, which also included $500 million of 0.75 percent, three-year notes raises a measure of the company’s debt load to the most in five years, the data show.
Investors accepted below-average relative yields from McDonald’s as concern mounted that Greece would exit the euro and disrupt global financial markets, stoking demand for safer securities. The Oak Brook, Illinois-based company is seeking to expand international operations even with world economic growth projected to remain below 3 percent this year and next.
“It’s international, so if Greece blows up, it’s not like McDonald’s is going to come out and say, ‘Our quarter’s shot,’” Andrew Feltus, who helps oversee about $11 billion of high-yield debt at Pioneer Investment Management Inc., said in a telephone interview from Boston. “It’s not highly cyclical, it’s a franchise business so margins are extremely high.”
McDonald’s is the most profitable of U.S. fast-food chains having a market value of more than $10 billion, with a net profit margin of 19.4 percent, Bloomberg data show. Its offering yesterday boosts the company’s ratio of debt to earnings before interest, taxes, depreciation and amortization to 1.35, the most since 2007 and the highest of the fast-food group, though that measure should fall to 1.29 as $638 million of bonds come due this year.
While McDonald’s shares cost less relative to earnings than competitors Yum! Brands Inc., Chipotle Mexican Grill Inc. and Starbucks Corp., its bonds have set records this year.
The restaurant owner claimed the lowest yield on 30-year debt on Feb. 2, and yesterday matched the record coupon set by IBM on May 8 even after the extra yield investors demand to hold investment-grade debt instead of government securities increased 23 basis points to 2.25 percentage points, according to Bank of America Merrill Lynch index data. A basis point is 0.01 percentage point.
Its 1.875 percent notes, which sold at 99.05 cents on the dollar yesterday, traded at 99.15 cents at 10:26 a.m. in New York to yield 2.01 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The three-year bonds traded at 100.2 cents to yield 0.68 percent.
Investment-grade debt is rated Baa3 and above by Moody’s Investors Service and BBB- or more at Standard & Poor’s.
Lower Than IBM
McDonald’s is rated A2 by Moody’s and an equivalent A by S&P, the sixth-highest grade. IBM is ranked two levels higher by Moody’s and one more by S&P, Bloomberg data show.
Borrowing costs for high-grade U.S. debt, at 3.47 percent, are still 43 basis points lower than at the end of last year, the data show.
“This is part of our normal course of business, and we take advantage of favorable market conditions when possible,” Steve Mazeika, a spokesman at McDonald’s, said in an e-mail message.
McDonald’s sold the new debt as it plans to hire 70,000 people in China this year, almost doubling its workforce there, and accelerates store openings there to compete with Yum! Brands’s KFC and Pizza Hut.
“It’s a high-quality credit,” Mark Pibl, head of credit strategy at broker-dealer Cortview Capital Securities LLC, said in a telephone interview. “People are coming out of high- yield” amid Europe’s debt crisis, making McDonald’s “a safe, stable upgrade trade,” he said.
McDonald’s 0.75 percent notes maturing in 2015 yielded 45 basis points more than similar-maturity Treasuries, compared with an average 126 basis-point spread for investment-grade issues of three-year bonds this year, according to data compiled by Bloomberg. The seven-year notes had a spread of 88 basis points versus a 221 basis-point average for equal-maturity issues.
High-yield U.S. bonds have lost 1.3 percent this month, while investment-grade corporate debt is unchanged, Bank of America Merrill Lynch index data show.
McDonald’s, which generates 68 percent of its sales outside the U.S., is also continuing its decade-long plan to boost revenue by renovating restaurants and expanding its menu to increase visits, according to Bryan Elliott, an analyst at Raymond James Financial Inc. in St. Petersburg, Florida. The chain has gained consumers in the hours between meals by improving its coffee and adding smoothies and snacks, he said.
“They’ve distanced themselves markedly from the rest of the competition,” said Elliott, who has an outperform rating on McDonald’s, meaning the shares will rise more than S&P 500 Index over the next 12-18 months.
McDonald’s will spend about $1.45 billion to remodel about 2,400 stores this year while opening 1,300 restaurants to give it about 35,000 locations worldwide.
The chain increased profit 4.8 percent to $1.27 billion, or $1.23 a share, in the first quarter, its slowest growth since December 2010. Comparable-store sales increased 7.3 percent globally in the same period, topping analysts’ estimates.
McDonald’s will also soon be under new leadership after naming 22-year company veteran Don Thompson as chief executive officer in March. The current chief operating officer will replace the retiring Jim Skinner, who led the company for seven years, on July 1.
The company, which has about $11.6 billion of bonds and term loans outstanding, is scheduled to repay 300 million euros ($378 million) of 6.25 percent notes in July and 250 million Swiss francs ($262 million) of 3.25 percent bonds in December, Bloomberg data show.
“MCD is far from desperate in its need to refinance, but it does have substantial maturities this year,” Carol Levenson of Chicago-based Gimme Credit LLC wrote in an e-mail message. Management has probably “observed the recent spread volatility even among high quality corporates and it’s always wise to get the annual refinancing done sooner rather than later.”
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