McDonald's Says Bank of America Won't Boost Loans (Update3)

Tag : tea & coffee set

Sept. 22 (Bloomberg) -- McDonald's Corp. , the world's largest restaurant company, told some U.S.franchisees to seek other ways to finance store improvements afterBank of America Corp. declined to increase lending.
Store owners have exhausted financing used to pay for upgrades andequipment to make lattes and espressos, and Bank of America won'tprovide more money as it works on the planned purchase of Merrill Lynch & Co., McDonald's said in a memo that wasobtained by Bloomberg News.
Banks have tightened credit following Lehman Brothers Holdings Inc.'sbankruptcy filing, the government takeover of Fannie Mae andFreddie Mac and more than $500 billion in writedowns and losses.Bank of America's reluctance to increase the loan may show thateven well-known brands such as McDonald's face difficultiesfinancing expansion.
``This is the first signal that turmoil in the financial markets isreaching McDonald's,'' Richard Adams , a former McDonald's franchisee in San Diego, said in a telephoneinterview. He's a consultant to about 300 of the company'sfranchisees and said he had spoken with someone who's seen thememo.
A stronger coffee blend introduced in 2006 lifted U.S. sales asconsumers buying coffee also purchased breakfast foods. McDonald'swants to sell lattes, mochas and other beverages at its almost14,000 U.S. restaurants by the end of 2009 as it seeks to win customers from StarbucksCorp., and is working with franchises to install the necessaryequipment.
``Bank of America has been taking steps to increase capacity tofund additional growth,'' McDonald's Treasury Department wrote in amemo that was forwarded Sept. 19 by Pete Zelasko to franchisees inthe Rocky Mountain region of the U.S.
No `Quick Solution'
``Its announcement last weekend of its intention to acquire aninvestment bank and the volatility in the debt markets, especiallythis past week, have impacted B of A's ability to get the quicksolution originally anticipated,'' McDonald's wrote.
Zelasko didn't respond to an e-mail request for comment. A messageleft for him at a McDonald's voice message box identified as hiswasn't returned.
McDonald's spokesman William Whitman declined to verify the memo's authenticity.
``McDonald's franchisees currently have credit access through 50regional banks and seven national institutions,'' said companyspokesman Walt Riker . ``We recognize current trends, but we want to make it clear thatMcDonald's and McDonald's franchisees have a variety of sources toget cash.''
Bank of America, which is based in Charlotte, North Carolina and isthe largest U.S. lender to consumers and small businesses, doesn'tcomment on specific customers, spokesman Scott Silvestri said.
Housing Crisis
McDonald's memo coincided with last week's efforts by TreasurySecretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke to stabilize U.S.financial markets.
The credit crisis, precipitated by loan defaults in the worsthousing market since the Great Depression, has forced othercompanies to adjust borrowing. General Motors Corp. said Sept. 19that it's tapping the remaining $3.5 billion of a revolving creditline to cover restructuring costs.
``The world seems more turned upside down this week than I've everseen,'' Irwin Kruger , a 60-year-old franchisee of four McDonald's stores in Manhattan,said in a Sept. 19 interview. The restaurant company is ``sendingout a warning shot to franchisees'' that they need to considerother lenders.
McDonald's fell $1.41, or 2.2 percent, to $62.57 at 4 p.m. in NewYork Stock Exchange composite trading . The shares have gained 6.2 percent this year.
Franchisee Loans
McDonald's , based in Oak Brook, Illinois, helps set up bank loans tofranchisees to pay for expansions and improvements, Kruger said.According to the memo, a Bank of America loan program called``Eagle'' is aimed at store owners investing in the introduction oflattes, mocha and other specialty coffee.
Merrill, based in New York, also provides financing for McDonald'sfranchisees.
Janna Sampson , who helps manage 268,216 McDonald's shares at Oakbrook Investments in Lisle, Illinois, said Bank of Americamay slow lending until it determines how much it and Merrill arecollectively loaning franchisees.
``As it looks at the two loan books together, Bank of America maydecide it has enough exposure,'' Sampson said. ``Even thoughMcDonald's has been a strong performer, the restaurant sector isexposed to the economic downturn, and Bank of America may thinkwe're not through the financial crisis yet.''
`Momentary Hiccup'
A slowdown in lending ``is probably a momentary hiccup'' in thecoffee expansion, Sampson said. ``We're probably talking weeks, nota quarter.'' Oakbrook Investments manages $1.4 billion.
McDonald's is ``identifying new sources of liquidity and loanprograms for our franchisees'' and expects to make announcementswithin the next several weeks, according to the memo.
Financial markets ``are very resilient,'' McDonald's said. ``Wehave seen previous periods of financial volatility, uncertainty andconsolidation in the past with events such as the Russian crisis in1998, Enron in 2000 and 9/11/2001, among others.''
The program is lending additional money only as repayments come in,McDonald's said. Pending loans have borrowing tied up for the nexttwo months.
Iced Coffee
About 99 percent of U.S. outlets are selling iced coffee and morethan two-thirds are selling sweet iced tea, McDonald's spokesmanWhitman said Aug. 28. McDonald's had 13,845 U.S. restaurants, withmore than 2,000 selling espresso, as of June 30, he said.
The addition of frappes, smoothies and bottled beverages startingin mid-2009 will turn McDonald's into a ``beverage destination,''Chief Operating Officer Ralph Alvarez told analysts Sept. 16 at a Bank of America conference.
Global sales at restaurants open at least 13 months climbed 8.5percent in August compared with a year earlier, helped by an 11.6percent gain in Europe and the dollar's decline against othercurrencies, McDonald's said Sept. 9.
August sales in the U.S. advanced 4.5 percent after almost a thirdof domestic restaurants sold large sodas and sweet iced tea for $1,part of the chain's emphasis on discounts that's also drawingcustomers overseas.
Franchisees should use excess cash to pay down loans, buy newequipment and expect to wait more than a month to get a new loan,McDonald's said in the memo.
Franchisees should avoid refinancing debt and ``shopping for loansbased on interest rates,'' the memo said. ``Apply early. Thelending community is currently working overtime.''
For Related News: For top financial stories FTOP <GO> Fornews on the credit crisis: NI CRUNCH BN <GO> U.S. restaurantindustry: TNI RES US <GO> Last Updated: September 22, 2008 19:00 EDT