NEW YORK – Standard & Poor's said Monday it may lower McDonald's Corp. (MCD)'s long-term debt ratings because a plan by the world's largest fast-food chain to close restaurants and cut jobs may not improve its business.
S&P said it may cut its "A-plus" rating, its fifth-highest grade, on McDonald's long-term corporate credit, senior unsecured debt and senior bank loan ratings, and its "A" rating, one notch lower, on the company's subordinated debt. S&P affirmed McDonald's "A-1" short-term ratings.
A downgrade might boost borrowing costs for McDonald's. The company had $9.6 billion of debt as of June 30, S&P said.
"There has been a slow reversal of progress over the years," S&P analyst Gerald Hirschberg said in an interview. "The customer image of McDonald's as a product and a store isn't what it once was, in terms of its menu offerings and its service" and cleanliness. He said any downgrade would likely not exceed one notch.
S&P's review came after McDonald's Chief Executive Jack Greenberg last Friday announced plans for the company to close about 175 restaurants in 10 countries and eliminate up to 600 jobs. McDonald's, with more than 30,000 restaurants, plans to open 600 outlets in 2003, down from 1,300 this year.
McDonald's, based in Oak Brook, Illinois, said the closures and job cuts would reduce fourth-quarter pretax earnings by $350 million to $425 million. The company has cut its earnings forecast twice in two months.
Hirschberg said McDonald's new "Dollar Menu" has helped add customers, though Burger King, a unit of Britain's Diageo Plc and McDonald's largest rival, is fighting back with a similar menu.
Although the restaurant closures and job cuts "may ultimately bring about some improvement," Hirschberg wrote, "we remain concerned that earnings are still being challenged by lackluster growth in the U.S. and problems internationally." He said McDonald's needs to decide where best to invest free cash flow given the potential for "significant" share buybacks.
S&P last downgraded McDonald's in October 2001. Moody's Investors Service rates McDonald's senior debt "Aa3," one notch above S&P, with a "negative" outlook.
McDonald's shares traded Monday afternoon on the New York Stock Exchange at $17.38, down 41 cents. They began the year at $26.47. The company's 5.75 percent notes maturing in 2012 were recently offered at a yield of 4.52 percent, or 0.68 percentage point above 10-year U.S. Treasuries, dealers said.