Hot-dog chain Nathan’s Famous found plenty of appetite for its second junk bond sale in two years on Wednesday, as investors scrambled to get in on the offering.
The iconic New York brand, started by Polish immigrant Nathan Handwerker as a Coney Island stand in 1916, raised US$150m through a new eight-year non-call three note that priced at a yield of 6.675%.
That was inside price talk of 6.75% area and whispers of 7% - and a far cry from the 10% Nathan’s had to cough up for its inaugural deal in 2015.
And even as the company’s restaurant business has been facing some headwinds recently, the strategy to focus on higher-margin business segments has started to pay off.
Licensing deals - through which Nathan’s contracts companies such as Smithfield Foods and Lamb West to produce and distribute its branded hot dogs, sausages and frozen French fries to retail stores - have been a particularly bright spot over the past couple of years.
“The biggest key to their success is growing their licensing business, which has nearly 100% margin,” said John McClain, a portfolio manager at Diamond Hill Capital Management.
“Anything they earn there is straight flow-through net income.”
Licensing royalties grew to US$20.4m in the fiscal year ended in March of this year, making up around 21% of Nathan’s total revenue. That was up from US$8.6m, or around 12%, five years earlier.
Nathan’s signed an 18-year licensing deal with Smithfield in 2014 under which it receives royalties of 10.8% on sales of its branded meat products.
The company faced little competition Wednesday in the US new issue market, where activity has slowed down as companies prepare to report quarterly earnings.
And with a couple of anchor orders driving the trade, most investors were left fighting for a particularly small size of the pie, another portfolio manager told IFR.
Unlike Nathan’s first bond deal, which was primarily issued to fund a special dividend to shareholders, the vast majority of proceeds from the new deal will refinance existing debt.
The company plans to spend US$144m of net proceeds to retire the 10% 2020s it issued in 2015.
The remainder - only around US$1.6m after fees - will be used alongside cash already on balance sheet to fund a US$21m dividend to shareholders.
Jefferies was the sole bookrunner on the deal, which is rated B3/B-.
