Moody's Pans Yum Brands Debt Rating (YUM)

In yet another beloved move by ‘independent ratings agencies,’ Moody’s Investors Service has placed the Debt Ratings (not equity) of Yum Brands Inc. (NYSE: YUM) on review for a possible downgrade.  The company’s senior unsecured debt rated Baa2 and guaranteed senior unsecured debt rated Baa1 were the ratings placed on negative review.

Moody’s cited the owner of Taco Bell, KFC, Pizza Hut, and others as having weaker than expected debt protection metrics because of its higher operating costs pressuring margins.  The review will focus on the impact of Yum’s operating performance, capital structure, and its financial policies and what the impact will have regarding its debt levels farther out on the horizon.  Two more key issues were the higher than expected debt levels and the under expectations in operating profits.  Also noted were higher operating costs for commodities and the weak consumer environment in the U.S. ultimately pressuring margins.

The negative review also noted that Moody’s doesn’t expect Yum Brands’ condition to improve
over the immediate or intermediate future.

Yum shares are down about 0.5% at $37.81 on normal trading volume.  As a reminder, debt ratings of this magnitude aren’t a direct stock exposure report.  But as stocks go from investment into (or closer to as this implies) junk status it does generally drive up borrowing costs.  As of March 22, Yum had $3.372 Billion listed in direct long-term obligations and some $6.534 Billion in total liabilities.

Jon C. Ogg
June 10, 2008