Hi team, been trying to educate myself about credit investing with all this free time and have had a couple of questions come up.
I've been looking at the Brinker International (Chili's owner) situation, which like all restaurants is struggling a lot. They've had a nasty habit of doing leveraged recaps to boost equity returns while keeping only enough cash on hand to for operations (~$10mm). As you can imagine, they're in a bit of a tough spot now, and equity and TEV is trading at a discount to peers.
Their capital structure looks as follows:
Total Debt ~$2,750mm, of which
* ~$1,400mm capitalized lease obligations
* $700mm RCF draw ($800mm capacity, lowered by lenders down from $1,000mm two weeks ago)
* $350mm senior unsecured 2024s @ 5.000% (trading at 78, YTW = 11.5%, BB-)
* $300mm senior unsecured 2023s @ 3.875% (trading at 69, YTW = 17.0%, B+)
As far as I can tell, the 5% 2023s are pari passu with the 3.9% 2024s, so I'm trying to understand why they are trading at such a significant discount, and why they are rated lower.
Is it simply because investors would rather, ceteris paribus, have the higher coupon? Don't understand how that causes such a wide spread in yields though.
Another reason I can think of is that the lower coupon makes it less likely they are going to be refinanced than the 5.0% notes (larger opportunity cost since they definitely will have to pay more than 5.0% for any new money), but that wouldn't explain the lower credit rating.
Would really appreciate any general insight into why pari passu notes would be trading at different levels!
According to the rating agencies, it looks like one class of notes has a guarantee and the other doesn’t.
Thank you – incredibly helpful comments. I did see the below language in the 2024s indenture, but thought it was boilerplate. Upon checking I can't find the same language in the 2023s so I guess not.
> Note Guarantees. As of the issue date, the Notes are guaranteed fully and unconditionally, jointly and severally, on a senior unsecured basis (the "Note Guarantees"), by the Guarantors. After the issue date, the Company will cause each of its Subsidiaries (as defined in the Indenture) that guarantees certain other debt to guarantee payment of the Notes on the same terms and conditions as those set forth in the Indenture. In the future, the Note Guarantees may be released or terminated under certain circumstances.
Whereby "Guarantor" refers to subsidiaries in California, Texas, and Florida.
So, if I understand correctly, the 2024s are HoldCo debt with an upstream guarantee from the OpCos in CA, TX, and FL. The 2023s are also HoldCo debt but don't have an upstream guarantee, so they are structurally subordinate to the 2024s (as well as things like OpCo payables, right?) and pretty much only rank above equity. Seems to be supported by this language in the 2023s indenture:
> The notes are effectively subordinated to the obligations of our subsidiaries. Our operations are conducted through our subsidiaries, none of which are guarantors of the notes. Although the notes are unsubordinated obligations, they will be effectively subordinated to all liabilities, including trade payables, of our current or future subsidiaries. As of March 27, 2013, our subsidiaries had approximately $46 million of outstanding indebtedness, consisting of capitalized lease obligations, to third parties, all of which would effectively rank senior to the notes.
Couple of follow-up questions. For the guaranteed 2024s, do capitalized lease obligations still rank senior to the notes? Are leases generally top of the stack?
And then the big question: to determine 2023s fair value, would I have to bifurcate cash flows between subsidiaries to understand cash flow available for HoldCo, or can I just treat the 2023s as junior to everything (including payables such as A/P or rent) and see what's leftover? If bifurcating, how would public credit analysts go about doing that given the company does not break down finances by subsidiary?
Capital leases would technically be senior to the notes, but I would think of those as senior secured obligations on a distinct pool of collateral (buildings, restaurant equipment, etc) rather than a senior secured claim on ALL assets.
I don't have much insight on your last question unfortunately. Without digging to much into their reporting disclosures, one idea would be estimating the earnings profile of the guarantors based on the proportion of owned restaurant in those states:
A high concentration of our Company-owned restaurants are located in Texas, Florida and California comprising 21.6%, 13.8% and 11.7%, respectively, as of June 26, 2019
Also, based on the public disclosures, it’s possible that the 5% notes have a more restrictive set of covenants that could limit the company’s strategic options and markets are expecting them to be refinanced.
5.00% Notes In fiscal 2017, we completed the private offering of $350.0 million of our 5.00% senior notes due October 2024 (the “2024 Notes”). We received proceeds of $350.0 million and utilized the proceeds to fund a $300.0 million accelerated share repurchase agreement and to repay $50.0 million on the amended $1.0 billion revolving credit facility. The notes require semi-annual interest payments which began on April 1, 2017. The indenture for the 2024 Notes contains certain covenants, including, but not limited to, limitations and restrictions on the ability of the Company and its Restricted Subsidiaries (as defined in the indenture) to (i) create liens on Principal Property (as defined in the Indenture) and (ii) merge, consolidate or amalgamate with or into any other person or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all of their property. These covenants are subject to a number of important conditions, qualifications, exceptions and limitations
Didnt look into it, but some thoughts that come to mind is that possibly the 2023s are at the at holding company level, whereas the 2024s are at an operating company level- leading to an instance of structural subordination allowing the creditors at the operating level to have a priority of claims status leading to a higher recovery (and therefore trades at a higher price). Not sure though- you would have to look at the corporate structure
That does seem to be the case, thank you for your input. Any thoughts on my comment above?
if I were you, I would invest the time in creating a Moody’s and S&P login. you can access for free “rating action” reports that detail and answer these questions, such as guarantor and holdco.
IMO Moody’s is the easiest to read but look at both
higher trading level for the guarantee. not a bond guy, im a loan guy, so I can opine on that. But see below from Moody's for your answer. (also for revolver, Borrower: Brinker International, Inc. (the “Borrower” or the “Company”); Guarantors: Brinker Restaurant Corporation)--I assume guarantor of notes is the same
Moodys - before downgrade (Sept 2019) Structural considerations The Ba1 rating on the non-guaranteed notes, the same as the CFR, reflect the position of these notes within Brinker’s unsecured capital structure. The Baa3 rating on the guaranteed notes incorporate the benefit these notes derive from guarantees of certain material subsidiaries which also house all domestic trademarks for Brinker.
Moodys - 23 Mar 2020 Rating Action: Moody's downgrades Brinker's CFR to Ba3; unsecured notes to B2; all ratings remain under review for downgrade Downgrades: ..Issuer: Brinker International, Inc. .... Probability of Default Rating, Downgraded to Ba3-PD from Ba1-PD; Placed Under Review for further Downgrade .... Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-2 .... Corporate Family Rating, Downgraded to Ba3 from Ba1; Placed Under Review for further Downgrade ....Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD5) from Ba1 (LGD4); Placed Under Review for further Downgrade .... Backed Senior Unsecured Regular Bond/Debenture, Downgraded to B2 (LGD5) from Baa3 (LGD3); Placed Under Review for further Downgrade Outlook Actions: ..Issuer: Brinker International, Inc. ....Outlook, Changed To Rating Under Review From Negative
I did actually use ratings agency reports during my summer at a bank but for some reason thought they are not available for free – thanks for the tip.
Do you happen to know any free resource that has syndicated loan trading levels?
you do have access to free reports trust me. I just did it myself and for a college kid. you don’t have full access. syn loan trading levels - you gotta ask someone w/ a subscription to LCD Lev Fin Insights or loanconnector, where it may be mentioned in an article, or someone in loan sales with a Bloomberg, which is more accurate. but good tho for your exercise. which deal are u looking for? any in particular?
Voluptatum ex voluptatibus deserunt ex a corporis at. Modi sunt aut impedit provident rem et sed. Rerum exercitationem et neque omnis vel voluptatum illum. In quas est incidunt sequi provident at. Iure dolorum unde et modi. Fugit ipsum omnis omnis quae.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...