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Moody's revises Yum! Brands' outlook to negative

Moody's on March 30 revised Yum! Brands Inc.'s outlook to negative from stable as the company deals with extended store closures and decreasing consumer demand due to the coronavirus pandemic.

"The negative outlook reflects the risk that there may be a sustained weakening in Yum's credit metrics as they are increasing debt levels at a time when the company is facing significant uncertainty surrounding the potential length and severity of restaurant closures and the ultimate impact that these closures will have on Yum's revenues, earnings and liquidity," Moody's senior credit officer Bill Fahy said.

He added that the outlook also takes into account the negative impact on the consumers' ability and willingness to spend on eating out until the crisis subsides.

Meanwhile, Moody's affirmed Yum's Ba2 corporate family, or CFR, rating as the company continues its drive-through, delivery and curbside pick-up operations. The company also has good liquidity to manage several months of significant revenue decline, and it can manage the business to preserve liquidity and then use cash flow to reduce debt once the crisis subsides, according to Moody's.

The rating agency also affirmed Yum! Brands' Ba2-PD probability of default rating, B1 senior unsecured regular bond/debenture and (P)B1 senior unsecured shelf.

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Moody's said it could upgrade Yum! Brands' rating if it could have sustained improvement in Pizza Hut U.S. while maintaining good operating performance at KFC and Taco Bell. The company also needs to maintain a financial policy that results in debt to EBITDA of about 5x and EBIT to interest of about 3x on a sustained basis.

Conversely, it could downgrade Yum! Brands if the company undergoes a sustained deterioration in credit metrics, even after restrictions on restaurants are lifted or despite a subsequent recovery in earnings and liquidity with adjusted debt to EBITDA remaining at or above 5.7x or EBIT to interest below 2.5x.