International Financing Review April 4 2020 5For daily news stories
@ visit http://www.ifre.comYUM! Brands
breathes life into US
junk bond market
Bonds First HY deal done remotelyBY DAVID BELLYUM! BRANDS re-opened the US
high-yield primary bond market
INûTHEû53ûWITHûAûlVE
YEARûNOTEû
ONû-ONDAY ûWITHûTHEûlRSTûDEALû
seen in the asset class since
March 4.
The fast food company, which
operates KFC, Taco Bell, Pizza
Hut, and WingStreet chains
WORLDWIDE ûPRICEDûAûlVE
YEARû
non-call two senior note, rated
B1/B+, at 7.75%.
With the book as much as 10
times subscribed the company
upsized the deal from an initial
US$500m to US$600m with
buyers taking a shine to the
attractive concession.
Goldman Sachs was left-lead
with Wells Fargo, Citigroup, JP
Morgan, Bank of America and
Morgan Stanley also bookrunners
on the deal.
The banks priced the bond at
the tight end of 7.75%–8.00%
price talk but still offered a
decent pick-up to where the
lRMSûûûBONDSûHADûLASTû
traded in secondary, at a cash
price of 92 to yield 5.83%,
according to MarketAxess.
It was a test of remote
capabilities for high-yield
bankers with the entire
syndication and sales teams
working from home, according
to a banker at one of the leads.
h7EûTHINKûITSûTHEûlRSTûEVERû
done in high-yield,” he said.BLAZING A TRAIL
95-ûWASûTHEûlRSTûOFûSEVERALû
borrowers last week that chose
to raise debt in the high-yield
market to shore up liquidity,
even though average spreads
have almost doubled since
March 4 when the last deal was
priced, to 911bp as of Thursday,
according to ICE BofA data.
But high-yield issuers are
taking the lead from
investment-grade names andbecoming more willing to pay
up for liquidity, given the
uncertainty over the economic
impact of the pandemic.
“YUM! catalysed the view that
putting cash on the balance
sheet is a good idea – and even if
they have to do it at a level
HIGHERûTHANûlVEûORûSIXûWEEKSû
ago, on a weighted average cost
of capital basis it is a rounding
error,” said another banker at
one of the leads.
The notes traded up to 104.
in the secondary after pricing,
where they have remained as of
Thursday, according to
MarketAxess.
YUM! was able to access the
market despite the impact that
coronavirus is having on its
operations.
The company said on March
24 that around 7,000 of its
restaurants around the globe
were shut, including more than
1,000 Pizza Hut Express units in
the US and over 900 KFCs in the
UK.
It is expecting a decline in
same-store sales in a range of
mid-to-high single digits for the
quarter ending March 31.
And the company warned that
second-quarter sales could be
worse hit “due to the increasing
number of markets currently
impacted”.
Moody’s changed its outlook
on the company’s ratings from
stable to negative on Monday,
saying the company was
increasing debt levels at a time
of substantial uncertainty over
THEûlNANCIALûIMPACTûOFûTHEû
pandemic.
In an earlier step to boost
liquidity, the company drew
US$525m on its revolving
facility on March 24, taking the
total amount drawn on the
US$1bn facility to US$950m – a
move it described as a
“precautionary” measure to
PRESERVEûlNANCIALûmEXIBILITY lNANCINGûHAVEûINJECTEDûSOMEû
optimism into the loan market
as there was a willingness from
a large number of banks to try
and do the deal and get the
pipeline going.
“Sponsors are approaching
BANKSûABOUTûWHETHERûlNANCINGûISû
possible and banks are trying to
work through it. Although
primary is notionally shut, if
something were to come with a
SIGNIlCANTûYIELDûITûCOULDûGETû
DONE vûTHEûlRSTûBANKERûSAIDûBEFOREû
the Asda sale was put on hold.
Any sponsor wanting to do a
deal would have to pay up for
the debt.
Banks typically have 125bp of
mEXûINûANYûDEALûALLOWINGûTHEMûTOûincrease pricing of an interest
margin or original issue discount
to tempt investors into a deal.
However, banks willing to fund a
deal now would ask for
SUBSTANTIALLYûWIDERûmEXûLANGUAGE
“Sponsors will recognise they
have to pay up to do a deal in the
current market and be open-
minded; docs can’t be as aggressive
EITHER vûTHEûlRSTûBANKERûSAID
A third banker said: “Lower
leverage, higher fees, higher
mEXûAREûALLûNEEDED ûBUTûTHEû
question is that even if you do
all of that, does it really matter?
You can price it up but if you
underwrite a meaningful size,
you need to make sure there is a
market to sell it to.” “Optically, this suggests that
the debt is extremely well
covered should the business run
out of liquidity,” Karnes said.
“However, it is somewhat
uncertain what these assets are
TRULYûWORTHûSHOULDûANYûlREûSALEû
come to pass.”
Carnival also offered a
covenant package that was
investor-friendly even by high-
yield market standards.
It includes a “very unusual
and investor-friendly” provision
that blocks Carnival from
making restricted payments for
at least one year, noted analysts
at Covenant Review.
Carnival suspended its
common stock dividend and
share repurchases, activities
prohibited under the restricted
payments basket, as part of the
lNANCINGûANDûLASTûMONTHûFULLYû
drew down on a US$3bn
revolver to lock-in liquidity.
The restricted payments
package allows access to the
build-up basket only if
consolidated leverage is below six-TIMESûINûYEARûTWOûANDûlVE
TIMESûINû
year three.
Investment grade companies
typically do not issue bonds
with these restrictions and even
several high-yield companies
were able to strip away these
kind of investor protections
before the corona crisis struck.
“I’m surprised by the market
sentiment for bonds being sold
by a cruise line,” said David
Knutson, head of credit research
at Schroders.
“I would have thought people
would be more circumspect and
cautious on buying bonds issued
by a cruise line given all the
challenges leisure and cruise
lines in particular are going to
face over at least the next
couple of quarters.”
Carnival has US$1.7bn of debt
maturing before the April 1 2023
maturity of the new debt and CBs
sold, but now has enough money
TOûSTAYûAmOATûINûAûZERO
REVENUEû
scenario for about 13 months,
according to analysts at UBS.
Royal Caribbean Cruises, by
comparison, would be able to last
six to seven months under a
similarly stressed scenario, the UBS
analysts said, so there may be an
ELEMENTûOFûSURVIVALûOFûTHEûlTTEST
Carnival, which operates 104
ships with another 16 under
construction, all which are
funded by committed export
credit facilities, is likely to sail
again. The fact that no one
knows for sure when makes last
WEEKSûlNANCINGûALLûTHEûMOREû
remarkable. 607080901001106 Feb 20 Feb 19 Mar 2 Apr
2020CARNIVAL CORP 1.875%
NOV 2022 BONDSource: RefinitivBid price4 IFR Top news 2327 .p 2 - 12 .indd 5 03 / 04 / 2020 19 : 29 : 28