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McDowngrade: S&P Cuts 'Releveraging' Junk Food Vendor's Debt To Almost Junk

Tyler Durden's picture




 

Having told the world that it will borrow billions (and cut capex) to "return all free cash to investors," it appears ratings agency S&P just needed to remind McDonalds that Shareholder-friendly releveraging no longer comes for free...

  • *S&P LWRS MCDONALD'S RTG TO 'BBB+' ON SHR BUYBACK PLANS

Who could have seen that coming?

Here's why... (via S&P)

McDonald's announced its intent to return an additional $10 billion to shareholders by the end of 2016, substantially funded by debt.

 

We are lowering the corporate credit rating to 'BBB+' from 'A-' since the company's various credit metrics will now be measurably worse than our previous expectations.

 

Our assumption is that debt to EBITDA will rise to the low- to mid-3x range during 2016-2017 versus around mid-2x previously.

 

The outlook is stable, reflecting our view that there will be continued progress in the U.S. and that credit metrics will not rise above 4x over the next two years as the company balances further share repurchases and a substantial dividend with the timing of success in the business turnaround.

  • *MCDONALD'S BOOSTS HOLDERS CASH RETURN TARGET BY $10B OVER PRIOR
  • *MCD SEES CASH RETURN TO HOLDERS ABOUT $30B 3 YR PERIOD END '16
  • *MCDONALD'S: MAJORITY $10B OF CASH RETURN FUNDED BY ADDED DEBT
  • *MCD SEES CAPEX DECLINING OVER TIME
  • *MCD SEES RETURNING ALL FREE CASH TO INVESTORS IN THE LONG TERM

*  *  *

It is notable how quickly S&P jumped on this - immediately slamming companies for aggressive shareholder-friendly releveraging.. as we noted previously,

Until recently, rising corporate leverage was primarily the result of companies desire to bolster shareholder value at the expense of bondholders —issue bonds and buy stock or issue bonds and buy a company. But in recent quarters declining earnings have been an important reason for the upward trend (Figure 4).

 

 

 

The 3-fold increase in share buybacks in the past five years has been the key driver of corporate re-leveraging. In large part, buybacks have been the result of strong incentives provided to corporate managers by activists in particular and equity investors in general.

 

But there are signs that this may be changing.

Given that we are clearly moving into a higher default environment we believe that equity investors may be inclined not to reward stocks that have large buyback programs. And if this is the case, corporate managers will have a diminished incentive to borrow money to finance buybacks.

*  *  *
Got it. So what Citi is saying is that now that corporate leverage is at record levels, the game is officially up and once the defaults start and the cost of capital begins to rise, no sane equity investors (of course nowadays the idea of a "sane" or even a "human" equity investor is an oxymoron) will ever buy into the story nor even think about throwing money at a secondary.

 

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Tue, 11/10/2015 - 16:04 | 6773819 Temporalist
Temporalist's picture

Kill the ginger!  It has no soul!

Tue, 11/10/2015 - 16:08 | 6773841 TBT or not TBT
TBT or not TBT's picture

Hint to eco-tard girly man CEO:  Use LARD to make fries.   They're delicious that way.  

Tue, 11/10/2015 - 16:15 | 6773879 Latina Lover
Latina Lover's picture

Rotten Ronnies reduced to Junk... Junk food, Junk Bonds, more than 1 Trillion served.

Tue, 11/10/2015 - 16:20 | 6773896 Fish Gone Bad
Fish Gone Bad's picture

McCancer

Tue, 11/10/2015 - 16:25 | 6773927 Skateboarder
Skateboarder's picture

GIGO: Garbage In Garbage Out, amigo.

If the Rounded-Up GMO-laden insectisided potatoes, preservative-pumped, flash frozen, and aged for millennia, are shit - you can fry 'em up in organic botique heritage lard from "Jerkoff Farms" (thanks to a ZHer for that one), and it will still taste like shit.

Tue, 11/10/2015 - 16:44 | 6774038 TBT or not TBT
TBT or not TBT's picture

Oh I dunno, you blind taste test fries made with lard vs with industrial vegetable oil I suspect you'd get 95% approval of the larded ones.  Humans love animal fat.  

Tue, 11/10/2015 - 16:56 | 6774102 Skateboarder
Skateboarder's picture

Yes, I love animal fat, and no, I will never blind taste-test anything not made from scratch by people I don't know.

An addendum for coffee... you wonder why a lot of people sugar the hell out of their coffee? Cuz it's shit coffee. Good coffee is enjoyed by its self, or with a bit of milk or cream, and optionally, a very small quantity of sugar, just enough to taste.

Tue, 11/10/2015 - 19:47 | 6774766 NoTTD
NoTTD's picture

My stock answer to the question "Do you want  (insert revolting sugery flavor) in your coffee?

 

Is: "No, coffee alreayd has a flavor.  It's 'coffee'".

Tue, 11/10/2015 - 22:55 | 6775618 TBT or not TBT
TBT or not TBT's picture

Have you tried lard in your Costco preground decaf yet?

Tue, 11/10/2015 - 19:49 | 6774773 NoTTD
NoTTD's picture

Penny:  This cobbler is great.

Mary Cooper:  Well, you know what the secret ingredient is.

Penny: Love?

Mary: Lard.

Tue, 11/10/2015 - 16:10 | 6773837 Francis Marx
Francis Marx's picture

So yes, Junk pretty much describes their food, so their bonds are well inline now.

Tue, 11/10/2015 - 16:37 | 6774001 813kml
813kml's picture

"i'm lovin' it"

Tue, 11/10/2015 - 16:09 | 6773846 Mr. Schmilkies
Mr. Schmilkies's picture

They will now change their $1 menu to the $2 menu.

Tue, 11/10/2015 - 16:32 | 6773970 DetectiveStern
DetectiveStern's picture

They've gone full hipster in London http://www.mcdonalds.co.uk/content/ukhome/promotions/signature-collectio... complete with brioche bun for $7 USDE.

Tue, 11/10/2015 - 17:04 | 6774145 Francis Marx
Francis Marx's picture

They should have a "Junk" menu. That way one would never be dissapointed after buying one of their meals.

Tue, 11/10/2015 - 16:09 | 6773847 poland spring
poland spring's picture

So they can 'return' $10 billion to shareholders by borrowing money but yet can't afford to increase the minimum wage.  So the people who do the actual daily work versus those have extra funds laying around to make money on those who do the actual work.  I don't remember shareholders serving me food. Well, I'm sure the down votes will commence.

Tue, 11/10/2015 - 16:13 | 6773863 Dr. Engali
Dr. Engali's picture

What part don't you get about entry level jobs?

Tue, 11/10/2015 - 16:23 | 6773912 Bemused Observer
Bemused Observer's picture

Dr. Engali, the concept of entry-level jobs was lost years ago. Our economy no longer operates under the old, well-established rules...such as the whole entry-level jobs thing...

Yes, it WAS a place for new workers to get their feet wet in the labor market, it was never supposed to be a CAREER.
But somehow, it IS, for more and more people. And it is also becoming a dumping-ground for people WITH other qualifications who cannot find work in their fields.

You can't use the same measurements when all the metrics have been changed.

Tue, 11/10/2015 - 16:25 | 6773932 poland spring
poland spring's picture

Exactly.

Tue, 11/10/2015 - 19:51 | 6774786 NoTTD
NoTTD's picture

Thought they changed your name to "Moland Springs" after the merger.

Tue, 11/10/2015 - 16:38 | 6774009 Kprime
Kprime's picture

They used to be entry level when there was an upward path in America.  They took the ladder away and now there are no jobs further up the scale.  Entry level is now the only job in america and it leads nowhere.

Tue, 11/10/2015 - 16:14 | 6773877 silverer
silverer's picture

Once again: McDonalds corporate does not set the pay rate for franchisees.

Tue, 11/10/2015 - 20:02 | 6774803 sun tzu
sun tzu's picture

Please don't confuse the economic illiterates with facts.

 

Commence with the downvotes.

Tue, 11/10/2015 - 16:43 | 6774036 Killdo
Killdo's picture

why woudl anyone downvote you? Too much common sense in your comment I guess

Tue, 11/10/2015 - 18:28 | 6774473 swmnguy
swmnguy's picture

A lot of people, apparently including those who run McDonald's corporation and many of their franchisees, don't realize that a lot of the same sort of people who eat at McDonald's are the same people who work there.  They seem to think their businesses exist in a vacuum.

Tue, 11/10/2015 - 19:58 | 6774830 sun tzu
sun tzu's picture

A lot of people, apparently including those who have never owned a franchise, don't realize that MCD employees are probably less than 1% of the customers. They seem to think that the employees are the only customers of the business

Tue, 11/10/2015 - 19:56 | 6774818 sun tzu
sun tzu's picture

Yes, it makes so much sense to pay unskilled workers $15/hr while the rest of the market is paying them $8/hr

 

You should open your own business and scoop up all these unskilled workers and pay them twice the prevailing wage. You'll be a billionaire in no time.

Tue, 11/10/2015 - 16:11 | 6773854 KashNCarry
KashNCarry's picture

Been wanting to see that clown fest business implode since I was a kid...

Tue, 11/10/2015 - 16:24 | 6773921 Fish Gone Bad
Fish Gone Bad's picture

The Hamburgler is now such a clean shaven man-bitch.  The old Hamburgler was kinda neat in creepy kind-o-way.  The old Hamburglar hangs off the sign at the McDonalds museum in San Bernardino.

Tue, 11/10/2015 - 16:51 | 6774082 813kml
813kml's picture

Old Hamburglar isn't allowed within 100 yards of children.

Tue, 11/10/2015 - 16:14 | 6773862 Bill of Rights
Bill of Rights's picture

A down grade huh, man that sucks..Its now

One half of a Half all beef patty, Half sauce, Half Lettuce, Half Cheese,  Half Pickle, Half Onion, on a Stale Bun.

 

Even in this Great Obama economic recovery these garbage fast food companies are losing big.

Tue, 11/10/2015 - 16:13 | 6773867 silverer
silverer's picture

I mean, what do you say to a clown in this situation?

 

Tue, 11/10/2015 - 17:30 | 6774271 Ajax_USB_Port_R...
Ajax_USB_Port_Repair_Service_'s picture

I know where he's staying. He's not taking calls.

http://www.cliquevodka.com/wp-content/uploads/2014/06/tonopah-nevada-clo...

Tue, 11/10/2015 - 16:27 | 6773885 Kaiser Sousa
Kaiser Sousa's picture

but, but, it was Mickey D's that was powering the Dow higher just last week on earning - or was it, buybacks - or some shit they told me......

 

 

Tue, 11/10/2015 - 16:33 | 6773974 SillySalesmanQu...
SillySalesmanQuestion's picture

Does being downgraded to BBB mean that they will have to do a burger buy back now..?

Tue, 11/10/2015 - 16:35 | 6773982 Kprime
Kprime's picture

I have noticed that ever since they switched to synthetic, GMO oils their customers are getting fatter by the day.  Back in the 60's when they used lard all their customers were skinny, me included.

Tue, 11/10/2015 - 16:36 | 6773994 Agent P
Agent P's picture

BBB+....almost junk....really???

Tue, 11/10/2015 - 16:38 | 6774005 all-priced-in
all-priced-in's picture

McD's is still more credit worthy than UST -

 

 

 

Tue, 11/10/2015 - 16:39 | 6774013 crazybob369
crazybob369's picture

With debt virtually "free", why not use it to return money to shareholders? After all, it's not as if Mcd's is a high tech company, or a resource company needing to re-invest its money into R&D, or exploration. Not much science behind slapping together a couple of Big Macs. What I find utterly laughable is that a credit rating agency lowers the rating of a company with a net asset value somewhere north of $20 billion, while keeping the rating of a basically insolvent nation (negative $20 trillion) at triple A.

A joke without a punch line.

Tue, 11/10/2015 - 16:49 | 6774072 csmith
csmith's picture

Oh, there's a punch line. That insolvent nation has a printing press, and the $20 billion company doesn't.

Tue, 11/10/2015 - 18:45 | 6774533 HowdyDoody
HowdyDoody's picture

The innovation comes in replacing as much of the product as possible with air or shop floor droppings while still being able to sell the end result.

 

Tue, 11/10/2015 - 16:47 | 6774057 AMPALANCE
AMPALANCE's picture

Cultiral Marxism claims another victim, Target marketing family-less money-less thugsters, howd that work out for you....clown!

Tue, 11/10/2015 - 16:57 | 6774115 bluskyes
bluskyes's picture

Bearish for IBM

Tue, 11/10/2015 - 17:11 | 6774176 mastersnark
mastersnark's picture

Looks like breakfast all day has solved all of its problems if it can borrow and give the cash away.

Tue, 11/10/2015 - 17:30 | 6774274 moneybots
moneybots's picture

"The 3-fold increase in share buybacks in the past five years has been the key driver of corporate re-leveraging."

 

Re-leveraging leads to re-deleveraging.

Tue, 11/10/2015 - 17:56 | 6774380 RaceToTheBottom
RaceToTheBottom's picture

The real reason is that the FED wanted to get rid of the Mac Burger Index.

They want to control all data....

Tue, 11/10/2015 - 18:14 | 6774436 alphawolf
alphawolf's picture

Their debt is still not rated the same as their food quality so it has more room to the downside...

Tue, 11/10/2015 - 18:31 | 6774481 swmnguy
swmnguy's picture

Everyone knows by now that these corporations are taking on massive debt to cheat on EPS ratios, to weasel bigger bonuses.  So, why the hell is anybody who has enough money to matter buying this debt?  Anybody willing to run a business that way isn't planning to pay the money back.

Tue, 11/10/2015 - 19:02 | 6774595 orangegeek
orangegeek's picture

Bearish for shitty hamburger lovers.

Tue, 11/10/2015 - 19:13 | 6774641 Able Ape
Able Ape's picture

Micky Dees' is a has-been, FINALLy 'Merika comes to its senses!  How bad is it?  McDonald's couldn't make a buck if Sophia Vergara was serving Hair-Pie in the back room....

Tue, 11/10/2015 - 19:37 | 6774717 SamuelMaverick
SamuelMaverick's picture

Another Paper Caper.

Once apon a time a well run company only took on debt if they had specific capital investments that they needed to supply their product or service to satisfy their customers.

 Now companies are run like GM before 2008, you issue bonds so you can continue paying ususpecting Grandmas their dividends - until it blows up in your face and you are bankrupt.

McDonalds just went full retard.

 

           Maverick

Tue, 11/10/2015 - 19:56 | 6774815 HowdyDoody
HowdyDoody's picture

Wow, who would have thought it. US CEOs putting Grandma's dividends before their own bonuses. Such self-sacrifice brings a lump to my throat.

Tue, 11/10/2015 - 19:53 | 6774800 NoTTD
NoTTD's picture

Bullish!!

Tue, 11/10/2015 - 20:21 | 6774930 Pipetex
Pipetex's picture

Give an IWatch with every happy meal...

Can I sit at the board now?

 

 

Thu, 11/12/2015 - 23:54 | 6785188 Phoenix901210
Phoenix901210's picture

I suppose the line 'given we are likely to move into a higher default environment' kind of says it all. Still though... This is some serious stuff!

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