S&P rates Yum! loan BBB-, notes BB

S&P said it assigned ratings to Yum! Brands Inc.’s operating subsidiaries’ proposed $3.3 billion senior secured credit facility and $2.3 billion unsecured notes.

Pizza Hut Holdings Inc., Taco Bell of America LLC and KFC Holding Co. will issue this debt.

The agency said it views the proposed debt issuance as largely in line with the company’s announced recapitalization plan, although it will rank senior to the existing notes.

The proceeds will be used to fund a cash distribution to shareholders, refinance its existing credit facility and for other general corporate purposes, S&P said.

The BB corporate credit rating and stable outlook on Yum! are unchanged.

The agency assigned a BBB- rating to the senior secured credit facility, which is composed of a $1 billion revolver, $800 term loan A and $1.5 billion term loan B.

The recovery rating is 1, indicating 90% to 100% expected default recovery.

S&P also assigned a BB rating to the $2.3 billion unsecured notes and the recovery rating 3, indicating 50% to 70% expected default recovery.

The agency also said it lowered the rating on the company’s legacy notes issued at Yum! Brands to B+ from BB and revised the recovery rating to 6 from 3, indicating 0 to 10% expected default recovery.

The downgrades of those ratings are because the proposed debt issued at the company’s operating entities as structurally senior to the existing notes.

The ratings consider the company’s leading market position in the highly competitive quick-service restaurant industry, strong geographic and brand diversity and a generally consistent operating performance track record despite volatile market conditions, S&P said.

The ratings also reflect the expectation for meaningfully higher leverage in line with the company’s communicated financial policy, which includes a leverage target of about 5x EBITDA, the agency added.

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