A Fallen-Angel Opportunity on the Bond and Equity Side: Yum! Brands, Inc. (NYSE:YUM)

May 9, 2016

Glenn Busch, Portfolio Manager at American Money Management, says that in terms of his firm’s Fallen Angels Income Fund, Yum! Brands, Inc. (NYSE:YUM) is an example of a fallen angel on both the bond and equity side.

On the bond side, even more for the fallen angels, especially on the corporate side, we prefer the true fallen angels that were investment grade, that maybe got knocked down to just below investment grade, and so a lot of those bigger funds have to drop those bonds out of their portfolio because they have been investing in investment grade.

An example is the Yum! Brands bonds when they announced they were going to split the company up, they’re going to take on some more debt, and the amount of debt they’re going to take on was going to drop their credit rating to just below investment grade, so a lot of those funds that own their bonds sold them. So we came in and we were able to buy them at a cheaper price for a bond that we think should be an investment grade, just because of rating issues, mark it down because of a certain debt level; we think that is very easily serviceable debt.

Busch’s firm recently added Yum! Brands on the equity side as well, after doing research on its upcoming spinoff.

The equity took a hit because they had their Chinese operations; they had a food scandal over there. Margins declined over there and also increased competition in China.

So we asked questions, “Will they bounce back, will they get market share back again after these food scares?” And it’s not a true apples-to-apples comparison, but we looked at past U.S. food scandals, how long it’s taken those companies to recover, and we gave it a more than reasonable expectation that Yum! China would bounce back. And we had the activist investors coming in. So we had the spinoff where there was a potential value unlocking of the two companies.

Glenn Busch