New York: A buyout of Wendy's/Arby's Group may cause weakness in the company's bonds, if an acquisition uses the addition of new debt in an attempt to spark gains in the company's stalled share price.
The fast-food company's chairman, Nelson Peltz, said last week in a regulatory filing that an unnamed party expressed interest in a potential deal involving the fast-food company that could include his participation.
Peltz said the company expects to discuss a possible transaction with potential "debt and/or equity financing sources, other shareholders of the company and other interested third parties." The cost to insure Wendy's legacy debt with credit default swaps rose to 215 basis points, or $215,000 per year to insure $10 million (Dh36.78 million) for five years, from 160 basis points before the news, according to Markit Intraday. Holders of some of Wendy's bonds are "at risk if this leveraged buyout goes through," Vicki Bryan, analyst at credit research firm Gimme Credit, said in a note. Wendy's 10 per cent bonds due 2016 have provisions that would require the debt to be bought back in an acquisition.
Protection
Other bonds, however, don't have the same protections and would likely be subordinated to any new debt taken on to fund an acquisition, she said. Peltz's Trian Fund Management owns a large portion of Wendy's/Arby's shares and will probably try to increase the share price, likely by adding new debt, Bryan said. Peltz was the force behind the 2008 acquisition of Wendy's by the owner of Arby's. Billionaire investor Peltz and Vice Chairman Peter May currently own 101.6 million shares, or 23.65 per cent, of Wendy's/Arby's stock, according to the filing. That is up from the 22 per cent reported in the 2009 annual report. Wendy's/Arby's shares had fallen to around $4 per share, from over $7 per share before Peltz struck the deal to buy the company in April 2008. The shares rose more than 7 per cent on Friday to around $4.65 per share on takeover hopes. The share drop has occurred in spite of the company spending $200 million in debt-financed stock repurchases since August. "Leverage has increased dramatically since the 2008 acquisition of Wendy's International, and Wendy's has little incentive to pay off debt given the meaningful overlay of top management," said Gimme Credit's Bryan.
