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[NEW YORK] McDonald's Corp sold a company record amount of debt today, three weeks after abandoning a plan to create a real estate investment trust favored by some shareholders as a way to unlock value from its massive property holdings.
The world's biggest restaurant chain sold US$6 billion of bonds in five parts, according to Bloomberg data. This follows what was a record US$4.3 billion issuance by the company in May.
"There is a lot of demand for global names with strong cash flow, and the McDonald's deal fits the description, so there's been a lot of enthusiasm," Jack Flaherty, a money manager in New York at GAM Holdings AG, which oversees US$127 billion, said in a telephone interview.
"The market feels much more positive about the company's performance than they had been feeling, and yields are still attractive at these levels."
McDonald's backed out of the REIT proposal after "serious consideration," McDonald's Chief Executive Officer Steve Easterbrook said Nov 10, instead deciding to focus on a plan that includes returning US$10 billion to shareholders by the end of 2016, much of it backed by debt.
Two major rating companies trimmed McDonald's rating after the announcement.
"We're taking advantage of favorable conditions and rates," McDonald's spokeswoman Heidi Barker wrote in an e-mail, without commenting on the size of the offering.
"These issuances are aligned with what our senior leaders discussed at our November investor meeting."
The longest-dated portion of the deal was US$1.75 billion in 4.875 per cent 30-year bonds that yield 1.95 percentage points more than comparable government securities, according to Bloomberg data. That's lower than the 2.3 percentage points at which the debt was initially marketed at, according to a person familiar with the deal who wasn't authorized to speak publicly.
McDonald's "is resorting to the customary 'balance sheet optimization' to boost earnings per share, the dividend rate, and the return of cash to shareholders," Carol Levenson, an analyst at Gimme Credit LLC, wrote in a note to clients. The firm has an "underperform" rating on the company's debt. "Fundamentals are uneven at best," she wrote.
'Aggressive' Policy Both Moody's Investors Service and Standard & Poor's dropped McDonald's credit rating one level to three steps above junk after the REIT announcement, criticizing the decision to return cash to shareholders with additional debt.
"Moody's views this increase as McDonald's maintaining an aggressive financial policy that will result in a material deterioration in credit metrics and limit its financial flexibility," according to a company statement.
Fitch Ratings revised McDonald's rating to negative from stable, citing the company's "aggressive financial strategy."
McDonald's sold on May 18 US$2 billion in a three-part sale that was its largest dollar-denominated issue since 2008, and 2 billion euros (S$3 billion) of securities in its biggest offering in the single currency. The borrowings came two weeks after McDonald's implemented the turnaround plan, an announcement that also drew ratings cuts from S&P and Moody's.
The company's shares fell 0.64 per cent to US$113.72 at 5.06pm in New York. The shares jumped 21 per cent this year, versus a 1 per cent gain by the S&P 500.