Overall, however, analysts, particularly those who have looked more closely at the deal, are hungry for the credit. A first market source said: “It offers a very resilient brand and as a relatively small tranche it won't be testing the market's liquidity in any way. And as such it is gathering strong interest".

A first buysider also agreed: “It’s a really strong brand and the management team is really good.”

RBI is an operator and franchisee licensor for Burger King, Popeyes and Tim Hortons, three fast food brands, in Spain. It also operates Burger King restaurants in Portugal, Andorra and Gibraltar.

RBI (B1/B) is raising a €538m TLB alongside an undrawn €150m RCF to support its LBO. The transaction will see Cinven buy 71% and Restaurant Brands International buy 10% of the company, while the founding family will retain 18.4%. The transaction values the business at €1bn, roughly an 11.2x multiple of the business’ LTM July 2021 EBITDA of €93m.

Structuring EBITDA of the business for this transaction is €107m, with adjustments including those for Covid. The business generated revenue of €511m in 2020.

Marketing off of net leverage of 4.7x, both Moody’s and S&P mention high leverage, with Moody’s-adjusted gross debt/EBITDA expected to be around 5.5x at close of the transaction (pro forma for the new capital structure and before the impact of IFRS16). This is expected to fall to 5x within 12-18 months. S&P puts its adjusted leverage for the business after the transaction at slightly below 5x, off total adjusted debt of €750m, including lease liabilities of €210m. Both agencies said leverage was high for the business’ rating.

Delicious deleveraging

Deleveraging is a main ingredient in this meal, as reflected by the documentation. As S&P notes, the low permitted debt basket restricts total net leverage to 5.8x or below and senior secured net leverage to under 4.8x.

As the first buysider said: “They have a robust plan to deleverage this” and the first market source agreed: “RBI is subject to a strict financial policy, and in the hands of Cinven, supported by a solid management team, nothing leads to believe it won't de-lever as expected.”

Restaurant Brands International’s involvement in the deal will also be a factor here. The minority owner will have a veto right on how much leverage the business can take that would result in net leverage rising beyond 4.5x (pre IFRS16), and with the intention for it to sit below 4x. RBI has been subject to this careful leverage diet for some time, though it received a waiver in 2020 due to the pandemic.

However, the business doesn’t appear to have needed it too much. The first buysider said: “They performed well during Covid-19. They set up their home delivery service way back in 2014, so it was easy for them to accelerate that during lockdowns and they were the market leader in terms of home deliveries in 2020. In fact, their stores were only 100% closed for 5 days during the pandemic. Also a lot of their stores are free standing ones with outdoor seating in suburban areas, so the kinds that people felt more comfortable returning to once restrictions eased.” The company also has its own delivery network of bikers and couriers.

As such, the company’s EBITDA remained robust in 2020, only dropping to €72m from €84m in 2019. The company’s EBITDA LTM July 2021 was €93m, showing strong signs of recovery.

It’s difficult to talk about fast food without mentioning McDonald’s, but the golden arches might not cast such a shadow in Iberia. The first market source said: It’s one of the very few places in the world where Burger King has a larger market presence than McDonald’s.”

Through Covid-19 also, the company also outperformed its peers. Said the first buysider: “They had this slide in the presentation showing how they performed versus companies like McDonalds and Telepizza during 2020 and they just massively outperformed them.”

Supersize me

Alongside deleveraging, growth is also very much on the menu. As S&P notes, the company has more than doubled its network from 223 in 2016 to 497 in 2020, from both greenfield openings and franchisees. Buysiders were also keen on the efficiency of these new openings. The first buysider said: “It only takes around six months for those new stores to start having an EBITDA impact, so it’s a quick progression.”

Buysiders and ratings agencies alike mentioned the execution risk of the expansion of the Popeyes brand. Some are concerned that the customer base would overlap with Burger King, though others note the difference between the two brands’ reputation in Iberia. The first buysider said: “They have a different reputation in Spain, they get more family and business customers. The stores are also nicer: 40% of their stores are less than 5 years old.”

While the Popeyes expansion may create something of a capex drain, the second buysider said: “Currently, around 90% of stores are Burger King, so branching out is good.”

Eat Your Greens

The first market source spoke about Cinven’s commitment to ESG in general: "We think they're thinking ahead on ESG and are more advanced than most on the topic."

The company said in a press release that it has industry-leading ESG credentials, including in areas such as supply chain traceability and a commitment to renewable energy. Burger King Iberia also has the “Rebel Whopper” range, which includes a vegan burger, that, in this author’s opinion, is one of the best fast food has to offer. This deal also offers ESG ratchets. 

Though, despite this, the first and second buysiders were concerned about long-term ESG trends away from meat. The second buysider said: “There are some questions around fast food in the long term and a move towards healthy eating, vegetarianism and ethical food supply chains. But I don’t think there will be any real ESG pressure in the sense of government regulation or investment mandates, just gradually changing customer desires.”

Bad smells

Despite the slate of promising evidence to support the credit story here, some whispers in the market remain negative on the credit for a number of reasons, not necessarily pertaining to the asset itself. 

A third buysider said: “We killed the deal because we don’t like the sector as a whole. We have an institutional concern about the space. Even pre-Covid it did terribly and loads of casual dining businesses went bust during Covid-19. People remember the restructurings, like Prezzo and Pizza Express and we try to be as careful as possible with these types of industries.” The second buysider shared this concern, also mentioning Pizza Express. 

Especially in markets as busy as this one, macro concerns such as these can render a credit like RBI missable, especially when situated in a small market like Spain. Some larger investors may not be looking too closely at the credit, but the local market will likely continue to be interested: “Despite the brands it represents, RBI is considered a very Spanish asset. Investors across Europe will be interested, but there will be a bit of a Spanish flavour to the investor base."

But in addition, it's not only the reputation of the wider casual dining industry but also of the family of restaurant chains that bear the Burger King name. A second market source said: “People look at Burger King France for example and draw conclusions. Perhaps negative ones.”

Burger King France has come to market this week with €620m in floating and fixed rate senior secured notes, and another €235m in senior PIK toggle notes. Proceeds will repay an €80m loan guaranteed by the French state and reduce the net debt of the group, plus repay a €174m (outstanding amount) shareholder loan. The French operation announced the sale of its Quick Restaurants division to HIG for €240m in July 2021, which closed on 8 October. 

Burger King France’s revenue suffered from the pandemic, falling from €490.5m in 2019 to €364.4m in 2020. It has recovered to near pre-Covid-19 levels to €478.8m for the LTM to June 2021. 

The first buysider also noticed the connection between the two deals, but had a different take: “Burger King is also refinancing now, but this is a much better credit.” Indeed, RBI is rated B1, while the notes of its counterpart in France are expected to be rated B3 by Moody’s. 

Food security

Concerns surrounding RBI specifically, however, included RBI’s lack of ownership of both the brand it operates with and its real estate. Said the first buysider: “One risk is that they just license the brand, they don’t own it, so if for some reason things do go bad, they don’t own real estate or brand to fall back on, there is just inventory and equipment.”

The second buysider agreed: “There is a big question on the lack of real estate. The security package here is mostly share pledges and receivables, which is some of the weakest you can get. Constraints around what debt they can raise mean I’m not worried about being subordinated really, but am just thinking about the worst case scenario and the lack of real assets.”

Nevertheless, the first market source was positive on this front, soothed by long-term agreements set in both cases. They said: “There are agreements in place for the use of the brands so that side is well protected. The long leases on the real estate also bring a lot of comfort on that front.”

Under its previous owner, Restaurant Brands International, land and building leases generally had an initial term of 10 to 20 years, while land-only lease terms could extend longer, according to the company’s 2020 annual report. Subleases to franchisees also had a tenor of around 10-20 years.

The proposed TLB is due 2028, while the RCF is due in 2027. The RCF is subject to a springing covenant of senior secured net leverage not exceeding 9.7x, tested when the facility is more than 40% drawn.

Several underwriting banks, including Sabadell, have participated in the RCF.

Pricing is currently talked at E+375-400 bps for the TLB, which the second buysider seemed apathetic about. They said: “E+375-400 is fine for a B1, but it’s not eye-catching when there are B2 names in sectors I do like paying E+400 or more. If it flexes wider it’s a definite yes for us, but we’re undecided on the current pricing.”

Santander and ING each have 50% of the book, while Bank of Ireland, BBVA and Rabobank are joint bookrunners on the deal. 

Santander and Cinven declined to comment, while ING and Restaurants International Iberia could not be reached for comment. 

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