The restaurant industry is a diverse and fragmented market, though several public companies operate large chains of fast food and casual dining restaurants. Several of the largest restaurant firms maintain significant indebtedness, which many investors monitor to navigate the risks and rewards associated with financial leverage. High leverage creates obligations that can lead to bankruptcy if business operations experience unforeseen downturns, and covenants with creditors can contain provisions that limit financial flexibility. QIP Holder LLC, which owns of Quiznos, and Sbarro LLC are two well-known restaurant chains that filed for bankruptcy in recent history, highlighting the risks faced by equity holders.
Yum! Brands Inc. (NYSE: YUM), Restaurant Brands International Inc. (NYSE: QSR), McDonald's Corporation (NYSE: MCD), The Wendy's Company (NASDAQ: WEN) and Bloomin' Brands Inc. (NASDAQ: BLMN) are five large restaurant companies with high financial leverage. Bloomin' Brands' compares poorly to these peers on the basis of liquidity ratios, profit margins and interest rate coverage ratio, indicating more risk. McDonald's scores more favorably on these financial health metrics and delivers high returns on equity due to its leverage.
Yum! Brands is a $35 billion global fast food restaurant company that owns such brands as Taco Bell, KFC, Pizza Hut and Wing Street. The company's chains have 42,000 locations in 140 countries. As of March 2016, Yum! Brands held $2.3 billion in short-term borrowings and $2.5 billion of long-term debt, with total liabilities of $8.1 billion. The company's long-term debt consists primarily of senior unsecured notes and an unsecured revolving credit facility. While other large restaurant chains have higher levels of debt outstanding, Yum! Brands' capital structure is more debt-heavy than its peers, because equity financing is less prominent. The company's debt-to-equity ratio was 51.7, and the debt-to-capital ratio was 0.97.
Restaurant Brands International
Restaurant Brands International is a $10.2 billion Canadian company that was formed in 2014 as a merger between Burger King and Tim Horton's, and 19,000 locations operate under the company's brands. As of March 2016, Restaurant Brands International held $8.5 billion of long-term debt and $17.5 billion in total liabilities. The debt included $5 billion of senior secured-term loans, $1.3 billion of senior secured first lien notes and $2.3 billion of senior secured second lien notes. The company's debt-to-equity ratio of 10.83 is one of the highest values among large restaurant companies, and its debt-to-capital ratio of 0.84 is also high.
McDonald's operates a leading global fast food chain with 36,500 locations, nearly three-quarters of which are franchises. As of March 2016, the company carried $24.4 billion in long-term debt and $655 million in short-term debt, and it had $29.9 billion in total liabilities. The debt was comprised of private offerings and bank loans, with a 3.8% weighted average interest rate. McDonald's March 2016 debt-to-equity ratio was 7.75, and its debt-to-capital ratio was 0.86, both of which are high within the industry. Large companies with stable cash flows are more likely to have debt-heavy capital structures, and McDonald's is by far the largest restaurant company in the world, with a $109 billion market cap.
The Wendy's Company
The Wendy's Company operates a chain of nearly 6,500 fast food restaurants, most of which are franchises. More than three-quarters of the locations are in North America, though the company also maintains a presence in Europe, Asia and South America. As of April 2016, Wendy's had $2.5 billion in long-term debt and an additional $23 million in the current portion of long-term debt. Total liabilities were $3.4 billion. The debt was comprised primarily of senior secured notes. Wendy's Company's debt-to-equity ratio was 4.66 as of April 2016, and its debt-to-capital ratio was 0.77.
Bloomin' Brands owns casual dining chains, including Outback Steakhouse, Bonefish Grill, Carrabba's Italian Grill and Fleming's Prime Steakhouse & Wine Bar. At the end of 2015, the company had over 1,500 restaurants and 100,000 employees, and it had a $2.2 billion market cap in June 2016. As of March 2016, Bloomin' Brands carried $113 million in short-term debt, $1.2 billion in long-term debt and $2.5 billion in total liabilities. That debt was comprised mostly of senior secured credit facility and a mortgage loan. The company's debt-to-equity ratio was 7.15, and the debt-to-capital ratio was 0.79.