Photographer: Edouard H.R. Gluck

Burger Bonds Test French Taste for Fast Food and Market's Tolerance for Risk

  • Fast food chain sells rare B- bonds on eve of ECB wind-down
  • Riskiest bonds underperformed in March as yields spiked

For more than 20 years Frenchman Jerome Tafani has sold fast food to a nation renowned for its haute cuisine. So selling some of 2017’s riskiest corporate debt just as Europe’s bond-market bonanza winds down may not be too much of a stretch.

At a meeting at London’s Andaz Hotel where a buffet was laid with fruit and croissants, the chief executive of Burger King France SAS made his case to bond investors.

“Some of you may feel it’s a pity French people are moving to the burger,” Tafani said. “But burgers are the perfect reconciliation of French taste: I want to spend less time, I like beef, I like French fries, I like bread.”

And sure enough, the French are moving to the burger. While many anglophones will know Paris Burger King as the fast food joint John Travolta’s character declines to visit in the 1994 film Pulp Fiction, fewer and fewer French citizens are staying away. Over the past five years, Euromonitor data show they’ve increased spending on fast food by 1 billion euros to 10.7 billion euros.

That may help ease concern that Burger King France’s new 565 million-euro ($601 million) debt offering will get caught in a downturn as the European Central Bank prepares to slash its corporate-bond purchases by as much a quarter in the months ahead -- uncorking bond yields it has kept suppressed for a decade.

For more on the reduction of the ECB’s monthly bond purchases, read this story.

While the ECB doesn’t buy junk-rated debt, it’s pushed other investors into riskier realms by sapping returns on the high-grade bonds that do fall under its mandate. The extra demand has helped junk-rated borrowers shave more than 2 percentage points off borrowing costs over the past year. The central bank’s withdrawal may mean many buyers will revert to safer, investment-grade rated assets.

The bonds were priced at final terms of 50 basis points down from initial indications. The issue included fixed-rate notes due in seven years yielding 6 percent and six-year floating-rate notes that pay 525 basis points more than money-market rates.

Yield Spike

Only three borrowers have tapped the European bond market this year with ratings as low as the B- grade S&P Global Ratings assigned to Burger King France. That’s six notches below the investment-grade boundary.

Already, yield premiums for speculative-grade borrowers have climbed 20 basis points since the start of March, according to a Bloomberg index that tracks the cost of this kind of issuance. Bonds with ratings similar to Burger King France’s have suffered more than better-ranked junk peers, according to a CreditSights report this week.

In the primary market at least, the pace of debt issuance has been uninterrupted: high-yield bond sales in March jumped 60 percent to 8.8 billion euros, more than in the entire first quarter of last year.

Buyers of the new bonds will need to put their faith in a turnaround plan engineered by Groupe Bertrand and former McDonald’s executive Tafani, who joined the company in 2016. 

Bertrand, a family-owned business and the Whopper’s local franchisee, added to its 26 France-based Burger King outlets by buying Belgium’s Quick chain in 2015. By turning Quicks into Burger Kings and adding new eateries, it aims to create a chain of 600 Burger Kings by 2020.

Cash Burn

The price tag for converting outdated Quick restaurants -- about 1.4 million euros apiece -- will consume all the company’s free cash flow until 2020 and much of the life of the bonds.

Debt at the company is already at 9.5 times earnings before interest, taxes, depreciation and amortization, or Ebitda, according to S&P. The new Burger King France bonds will be used to redeem existing notes from Quick Group that would have come due in April and October 2019, and as such won’t add debt to the company’s balance sheet, but will push out maturities by a few extra years.

While the expansion is underway and the company is burning cash, proceeds from last year’s sale of Quick restaurants in Belgium and Luxembourg can finance spending -- but only for the next 18 months, according to Solene Van Eetvelde, a credit analyst at S&P in Paris.

The 36 restaurants that have already been fixed up and rebranded have more than doubled their same-store sales, and are attracting more customers than even competitor McDonald’s, she said.

“If the conversion plan doesn’t translate into sufficient Ebitda growth and free operating cash flow in the medium term, they could face liquidity issues,” according to Van Eetvelde. “So far, they have managed to generate much higher average sales than Quick restaurants, but that’s based on a limited number of conversions.”

— With assistance by Katie Linsell, Edith Fishta, Fara Babaev, and Anne Swardson

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