Despite junk ratings, Yum! Brands transaction receives high-grade treatment

By Paul A. Harris

St. Louis, Mo., June 25 - Yum! Brands, Inc.'s new 10-year senior notes priced off investment-grade syndicate desks even though they carried three junk ratings - Ba1 from Moody's Investors Service, BB from Standard & Poor's and BB+ from Fitch Ratings.

Shortly after terms of Yum! Brands' $400 million deal circulated through the market, one sell-side source not involved with the syndicate told Prospect News that it is not uncommon for a deal such as Yum! to price off high-grade desks.

"That's a high-grade name practically," this sell-sider said. "It priced at 292 [basis points] over Treasuries - that's an investment-grade type of spread.

"The rating agencies are always off," this official added. "They're either being too diligent or not diligent enough. Hell, you look back two weeks before Enron defaulted they were a triple-B rated name.

"Tricon's a name that is going to continue to improve. They're just a phenomenal company. And they're huge."

Yum! Brands, previously known as Tricon Global, upsized its note sale to $400 million from $350 million and priced it at 99.45 to yield 7.78%, 292 basis points over Treasuries and tight to talk that put the spread in the 295 basis points area.

Tim Jerzyk, director of investor relations for Yum! Brands, told Prospect News shortly after the Tuesday transaction that the feeling within the company is that it is poised to go high grade.

"We have never been investment-grade since we've been a public company but I think the belief in the fixed-income community is that at some point in time we're going to be," he said.

"When you look at our coverage ratios and our leverage ratios we're pretty much in the ballpark of investment-grade companies."

Jerzyk pointed out that Moody's Investors Service assigned an investment grade Baa3 rating to Yum! Brands, Inc.'s new $1.4 billion senior unsecured guaranteed three-year revolving credit facility on Tuesday.

Yum! Brands' predecessor Tricon Global was spun off from Pepsi-Co in 1997, and operated KFC, Pizza Hut and Taco Bell. Those three brands turned out comparable-store sales gains of 5%, 2% and 8% respectively during the first quarter.

Recently it acquired Long John Silver's and A&W - hence the name change because the company now operates five brands instead of three. YUM is the ticker symbol.

According to Jerzyk, Yum! operates over 32,000 restaurants around the world, giving it more locations than McDonalds, although Yum! is second to McDonalds in sales.

Jerzyk said that the Louisville, Ky.-based company's capital spending figures to amount to $800 million this year.

"That's the sustainable level going forward," he added. "The cash we generate is over $1 billion and that will only continue to grow."

In rating Yum!'s credit facility Baa3, and confirming the corporate and bond ratings, Moody's noted that since its spin off from Pepsi-Co in 1997 Yum! has substantially reduced its reliance on bank debt from nearly 100% in 1997 to less than 5% and has staggered its debt maturities appropriately.

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