Applebee's International, the developer and operator of franchise restaurants, waited for a three-year prepayment penalty on its old term loan to end before switching to a cheaper $150 million, three-year revolving credit facility led by BANK ONE. Carol DiRaimo, director of investor relations, explained the old $225 million loan was arranged in 1998 when Applebee's financed Rio Bravo, another concept requiring significant capital expenditure and restricting cash flow. The term-loan component had a minimal amortization schedule and higher rates of LIBOR plus 21/ 4%, she explained. It was led by BANK ONE with Merrill Lynch as the arranger, she noted. Rio Bravo was sold off in 1999, improving cash flow, reducing capital expenditure and changing the borrowing requirements. The old term loan was not set to mature until 2006, she noted.
Debt to EBIDTA ratios are now very good and a revolver is more suitable since it allows Applebee to dip in and out as required, DiRaimo said, adding the rate is also a far more favorable LIBOR plus 1%. Merrill Lynch was required to arrange the last loan, but is not on the new syndicate, comprising eight banks. "Merrill has a higher fee structure, but was required for the added complexity last time," she said, stating "Investment banks are costlier than commercial banks." No bid was put out and BANK ONE was re-selected to lead, she stated.
Applebee's is also benefiting from very low interest rates, DiRaimo cited. Last year the interest rate level was around 6% and the all-in borrowing cost was 81/ 4%. This time the all-in rate is about 3%. The last agreement was accompanied by interest-rate swap agreements, designed to cap the interest rate at 6%, which have now been terminated, she added.