- Credit rating is lowered three levels to BB from BBB
- Company expects to return $6.2 billion to shareholders
Yum! Brands Inc. had its bond rating downgraded to junk by Standard & Poor’s Ratings Services, which said the fast-food giant’s planned share buybacks and dividends will probably require more debt.
The rating was lowered three levels to BB, the second notch below investment grade, from BBB, S&P said Thursday in a statement. The rating service gave the debt a "stable" outlook. Moody’s Investors Service rates the bonds Ba1, its highest junk rating.
Yum on Thursday said it would return as much as $6.2 billion in cash to shareholders before the planned splitoff off its China business, which is expected to be complete by the end of next year. That move will be accomplished through share buybacks and special dividends, Yum executives said in a presentation to analysts and investors.
“The downgrade primarily reflects our expectation of the company’s meaningfully higher leverage as it executes on its newly communicated financial policy,” Helena Song, an analyst at S&P, said in the statement.
Yum agreed to split off its Chinese division in October after investors pressed for the move, saying the two businesses could be better operated separately. The new Yum will be mostly franchised and require little capital investment, while the China unit, which is mostly company owned, will be focused on operating and opening new restaurants.
Yum said it plans to carry debt of about five times its earnings before interest, taxes, depreciation and amortization going forward.
“That is at about the midpoint of our highly franchised restaurant peers and we feel that this is the right number,” Chief Financial Officer Pat Grismer said. “We’re more comfortable taking on financial risk.”
The company has about $2.5 billion of bonds outstanding, and most of them were little changed after the announcement. Yum’s $350 million of 3.75 percent bonds maturing in 2021 fell 0.25 cent to 92.75 cents on the dollar to yield 5.2 percent at 3:53 p.m. in New York.
Yum shares fell 0.8 percent to $73.18 on Thursday in New York. The Louisville, Kentucky-based company’s stock is little changed this year.