McDonald’s bonds walloped by currency upheaval: Argentina credit
By Bloomberg
The plunge in Latin American currencies is turning Arcos Dorados Holdings Inc.’s strength into a liability.
The world’s biggest franchisee of McDonald’s Corp. restaurants has seen its benchmark debt tumble since Dec. 9, when Moody’s Investors Service to cut the Buenos Aires-based company’s ratings for the first time as currencies from Venezuela to Brazil depreciate. The 3 percent drop in the bonds is more than twice the average in Argentina and emerging markets.
Arcos Dorados has enjoyed lower borrowing costs than other Argentine companies because it gets about 75 percent of sales from foreign markets in Latin America, making it less vulnerable to the nation’s foreign-exchange controls. The advantage is now dwindling as the region’s currencies suffer the longest losing streak since 2001, data compiled by Bloomberg show.
“The price has come off quite a bit, and foreign exchange continues to be a risk,” Omar Zeolla, an analyst at Oppenheimer & Co., said by telephone from New York. “Companies that export are probably safer bets.”
A spokesperson for Arcos Dorados didn’t respond to e-mail or telephone messages seeking comment on the performance of the company’s bonds.
The McDonald’s franchisee, which operates 2,086 restaurants across the region, said Nov. 4 that its third-quarter profit fell 99 percent in part because weakening currencies resulted in lower revenue when translated into dollars.
Yuca Fries
Moody’s lowered Arcos Dorados’s rating one level to Ba3, or three steps below investment grade, citing “the recent adjustment in the Venezuelan official exchange rate and ongoing depreciations of other currencies in the region.”
In July, Arcos Dorados said it adjusted its exchange rate for Venezuela to a level that’s 80 percent weaker versus the dollar than the rate it previously used. It said last week that outlets in Venezuela ran out of potatoes and are now serving alternatives such as arepa, a flatbread made out of maize, or French fries from yuca, a starchy root.
Arcos Dorados, which means golden arches in Spanish, gets about half its sales from Brazil, where economic growth is sluggish and inflation is soaring.
The region’s currencies have declined for six straight months, falling about 13 percent against the dollar since the end of June, as the sell-off in commodities globally throttles countries’ export income.
Gabriele Bruera, an emerging-market money manager at Compass Asset Management, said he isn’t selling the firm’s Arcos Dorados bond holdings.
Still Golden?
“It’s a defensive credit in this environment,” he said by telephone from Lugano, Switzerland.
Even after the downgrade, Arcos Dorados remains Argentina’s highest-rated company after Petrobras Argentina SA, a unit of Brazil’s state-controlled oil producer.
Arcos Dorados’s $474 million of bonds due 2023 yield 7.05 percent, less than the 8 percent average for Argentine companies and below government borrowing costs of 9.3 percent.
The yield “doesn’t compensate for Arcos Dorados’s exposure to weakening currencies,” Oppenheimer’s Zeolla said. “I’d be very cautious.”