Dunkin’s financial story still has holes

By Timothy Sifert
November 16, 2010

The authors are a Reuters Breakingviews columnist and a guest columnist. The opinions expressed are their own.
By Lisa Lee and Timothy Sifert

The buyout barons behind Dunkin’ Donuts are taking out some dough. Nearly five years on from one of the era’s most aggressive leveraged buyouts, Bain Capital, Carlyle Group and Thomas H. Lee Partners are hiking up debt on Dunkin’ Brands, which owns the doughnut chain and ice cream retailer Baskin-Robbins, taking out a $500 million dividend in the process. Equity holders may get a short-term buzz, but debt investors should beware.

The refinancing will leave Dunkin’ with a debt-to-EBITDA ratio of more than 7 times, a heavy burden even in the best of circumstances.

True, it’s a lighter load than the original LBO leverage level of 8.5 times, when the private equity trio bought out the company for $2.4 billion. But these are different times, and banks and investors are supposed to have learned the dangers of too much leverage.

Dunkin’s new debt holders probably take comfort in the fact that the firm managed the most severe recession in memory loaded up with debt. It grew its franchise numbers by 3.7 percent during 2009, and spent this year adding even more. Sales are up as well.

Those figures, however, are a slow-down from Dunkin’s impressive growth between 2006 and 2008, when the private equity owners initially polished Dunkin’ Donuts’ image and pushed into coffee. It’s questionable whether similar rates of growth can be achieved again.

Also, the new debt costs more than the original package, in which Lehman Brothers and JPMorgan engineered a securitization of franchise royalty fees that was wrapped by Ambac, the long-since hobbled bond insurer that finally filed for bankruptcy last week. While details aren’t yet certain, Dunkin’s interest bill will be several times higher and that will leave the company less financial room to maneuver if performance softens. The underlying Libor benchmark interest rate could rise, too.

Of course, in an ultra-low interest rate environment, debt investors and lenders are chasing yield — and riskier credits like Dunkin’ provide more of that. But longer term, these particular doughnuts could present a health risk to creditors.

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