Hamburger maker serves up juicy bond

CKE Restaurants had to work a bit to get its high-yield bond offering priced last week.

The owner of Carl’s Jr and Hardee’s quick-service restaurant chains, which target “young, hungry guys”, came to market with a US$600m eight-year non-call four senior secured second-lien offering as part of its buyout by Apollo Management. But investor pushback led underwriters to tighten up a number of covenants and price the deal with a juicy 11.75% coupon.

The difficulty illustrated both the tough conditions at the time – markets sold off during the entire marketing process – and the leverage that investors have to demand better terms on trickier deals. But also, in this case, buysiders were far more discerning about who exactly was involved in the deal.

Apollo doesn’t have the greatest reputation in the bond market, and investors are quicker to look for trouble when they are involved, some market players pointed out.

Indeed, the deal’s covenants came under closer-than-usual scrutiny by investors.

Among the initially proposed terms, the company would be able to enter into sale/leasebacks of up to US$260m of existing property and add on first-lien debt based on a 4.25 times secured leverage ratio.

Terms also included loose language surrounding dividend pay-outs and sneaky add-backs for items such as “business optimisation costs”, according to Covenant Review, an independent credit research firm.

Investors quickly rejected the initial covenants, leading CKE and its underwriters, Morgan Stanley, Citigroup and RBC, to turn around with a chart of proposed changes before sending out a new version ahead of pricing the deal last Tuesday.

Among the dozen or so changes, the US$260m sale/leaseback number was cut to US$200m with other restrictions added and the company pledged 90% of its real estate assets to the notes instead of 50%.

The additional first-lien 4.25 leverage ratio was shrunk to a flat US$125m. Some of the add-backs were removed and language was added that prevented the sponsors from paying any kind of dividend unless the secured leverage ratio is four times Ebitda maximum.

“They were trying to be typical ’Apollo covenants’ and they wound up with something more like what sponsor covenants are supposed to look like when people pay attention,” said Adam Cohen, founder of Covenant Review.

Originally talked at 10.50%, initial whispers on the deal were heard to be the low 11% range, which were then pushed out to the mid-11% area before pricing.

In the end, underwriters found the right level in the changed market and the B2/B rated deal was oversubscribed at an 11.375% coupon at a discount of 98.085 for an 11.75% yield. The notes performed well in the secondary market, rising to 99 later in the week.

Apollo paid US$12.55 cash per share, or roughly US$1.05bn total value, including the assumption of US$309m of net debt for the restaurant operator. The buyout also included a new US$100m senior secured revolver and US$456m in equity from Apollo.

The bond deal marks one of the largest LBO offerings to get done in the high-yield market since the financial crisis took hold.