Bond Traders Sound Alarm as Brazil Woes Sink McDonald's Operator

  • Yields have jumped to a record since S&P cut Brazil's rating
  • Arcos Dorados says it will reduce debt levels next year

Bondholders in Arcos Dorados Holdings Inc., the franchisee of McDonald’s Corp. restaurants based in Buenos Aires, are becoming the latest victims of Brazil’s woes.

The hamburger chain, which for years enjoyed lower borrowing costs than other companies in Argentina because of its sales throughout Latin America, is now suffering as currencies tumble across the region. Brazil, where Arcos Dorados gets half its revenue, is heading for its worst recession in 25 years, causing middle-class families to scale back consumption of Big Macs.

The slump has been disastrous for bondholders. Since Brazil’s credit rating was cut to junk by Standard & Poor’s last week, yields on Arcos Dorados’s bonds due in 2023 have surged to a record 8.7 percent. The securities have fallen more than any other corporate bond in Argentina this year and slid another 1.9 cents at 4:53 p.m. in New York, the most since March. 

This month alone, the notes have declined four times as much as those in emerging markets.

"Brazil looks more like Argentina now," said Fernando Jasnis, a money manager at Explorador Capital Management. “While the company now needs to get higher sales in Brazil after the real devaluation in order to get more dollars, it’s also getting hit by the slow pace of the economy."

Sonia Ruseler, a spokeswoman at Arcos Dorados, said the company has a “long-term strategic plan in place to improve profitability and strengthen our balance sheet.” To achieve that goal, the company will reduce its debt by the end of 2016 and cut expenses by the end of 2017.

Brazil Woes hit Latin America's Golden Arches
Brazil Woes hit Latin America's Golden Arches
Source: Bloomberg

Investors in the fast-food restaurant operator paid a premium to buy the notes in 2013 as the borrower used its Brazilian revenue as a hedge against Argentina and the rest of Latin America. Two years later, revenue in Brazil fell by more than 20 percent to $350 million in the second quarter. Of 2,120 restaurants Arcos Dorados has operated in the region, 41 percent are in Brazil.

The yield on the company’s real-denominated bonds due July 2016 reached a record 23.15 percent on Sept. 10, a day after Brazil’s downgrade.

“As Brazilian people worry about their jobs, they go out less,” Woods Staton, the chairman who stepped down as Chief Executive Officer last month, said on an Aug. 11 earnings call. “We get people when they go to the movies or they go out shopping. So, when they reduce that, that obviously hurts us, and I think people in Brazil today are worried.”

Brazil’s economy lost almost 900,000 jobs over the last year. Those who were able to keep their jobs, have less money to spend as wages fail to keep pace with inflation. Retail sales in June dropped for the fifth straight month, the longest streak since 2001, data from the national statistics agency show.

While Brazil’s economy may begin to recover next year, things may get worse before they get better, according to Mariano Tavelli, the president of Buenos Aires-based brokerage Tavelli & Co.

“Arcos Dorados is a case that shows the importance of Brazil for the region,” he said.

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