Dunkin Brands Adds to Debt. Investors to Take $500 Million Dividend

This is a group of heavy hitters looking to remove some serious money

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

The move to add more debt onto Dunkin does have it's share of risks reports this NY Times Article

True, it is a lighter load than the original leverage level of more than eight, when the three private equity firms bought the company for $2.4 billion. But circumstances are different, and banks and investors are supposed to have learned the dangers of too much debt. Dunkin’s new debt holders probably take comfort in the fact that the company managed the most severe recession in memory despite being loaded up with debt. It increased its franchise numbers by 3.7 percent during 2009 and spent this year adding more.Sales are up as well. Growth, however, has slowed since 2006 to 2008, when the private equity owners polished Dunkin’ Donuts’ image and pushed into coffee sales. It is questionable whether similar rates of expansion can be achieved again.

The PEG's had better hope growth continues

Dunkin’s interest bill looks sure to be several times higher than it was. That will leave the company less financial room to maneuver if performance softens.Of course, in an ultralow interest rate environment, debt investors and lenders are chasing yield, and riskier credits like Dunkin’ Brands provide more of that than safer instruments. But longer term, these particulars could present a health risk to creditors.

About the Author: Ed Teixeira has over 35 years of franchise industry experience as a franchise executive and franchisee. He has served as a franchise executive in the c-store, manufacturing and home healthcare industries and has licensed franchises in Asia, Europe and South America. Ed operates FranchiseKnowHow  which provides information and advice to prospective and existing franchisees and franchisors. He publishes newsletters for the franchise community.