BNP Paribas will launch syndication tomorrow of a $150 million credit for CKE Restaurants, the parent of fast-food chains Hardee's and Carl's Jr., against the backdrop of a saturated quick-service restaurant (QSR) market and waning consumer demand. But Executive V.P. and CFO Ted Abajian said the company is betting on a premium quality, 1/4-1/2 pound, Angus beef hamburger at its lagging Hardee's chain to improve sales, rather than go the healthier route espoused by industry analysts.
Several sector analysts have been making indications as of late that too much debt and weak cash flows could lead to loan defaults for quick-service and family restaurant companies (LMW, 9/8).
Standard & Poor's, in a recent credit report on the QSR sector, states that core customers are increasingly opting for healthier food. But Abajian said the healthy options on its restaurant menus are usually not big sellers. "Our research tells us that on the healthy eating front, a good number [of people] actually don't [eat healthy] and then there's a number of people who couldn't care less," he said. "Hardee's has been a jack of all trades and a master of none . . .we've chosen to fish in the biggest sea" for hamburger market share. He added that over time, CKE hopes the strategy will give Hardee's a solid foundation. "At a point in time, we could maybe do salads."
S&P is keeping a close eye on the high-quality burger, along with the Hardee's revamped lunch and dinner menu, said analyst, Gerald Hirschberg, explaining that the fast-food restaurant subsidiary has not been as successful as competitors in its lunch and dinner sales. "Although this strategy, if successful, could enhance long-term profit in the near term, it increases CKE's business risk. Profitability has been negatively affected during this transition," notes Robert Lichtenstein, an S&P analyst, in a later report that rates the credit at B. "[However,] risks are somewhat mitigated by the company's established Carl's Jr. concept," S&P notes. CKE has had eight or nine consecutive years of success at Carl's Jr., Abajian noted. A BNP official declined to comment.
The credit will most likely include a four-and-a-half-year, $25 million term loan and a three-year, $125 million revolver, a banker familiar with the deal said. Price talk on the term loan is LIBOR plus 33/4%, he stated, noting that there was a significant amount of lender inquiry for the deal last week. There is significant asset coverage, he added.
CKE is using the proceeds from the credit and from $90 million in new 4% convertible subordinated notes that are rated CCC/Caa1 to refinance $122.3 million in 41/4% convertible notes due March 2004. "The refinancing will improve CKE's financial flexibility by extending the company's maturities," S&P says. Moody's Investors Service rated the new credit relatively higher at B1. BNP Paribas leads an existing $100 million revolver for Santa Barbara, Calif.-based CKE. CKE had $398 million of debt outstanding as of Aug.11, 2003.