Wendy's Challenged With Covenant Compliance

Wendy’s (WEN) delivered their news yesterday. Of course it has just been restructured and financially re-engineered and now has a newer management group in charge. They pulled the breakfast menu because it was not working and will try to come back with a winner. They insist the product pipeline is looking good. But none of the comments really focused on breakfast. They continue to focus on improving margins and seem to be digging their way out of the $0.99 low margin fiasco that the QSR industry managed to get itself into.

The issue that concerns me the most is Wendy’s attempts to restructure their borrowings and make covenant compliance more manageable. This of course makes sense but why was it not thought of before all the wheeling and dealing. Lenders will now be asked to view financial statements is a different fashion. The conflict will develop as to how long the maturities will be scheduled for. Lenders may wish for quicker repayment. This will compete for cash flow for capex. If capex is not adequately funded than corporate momentum will falter. If the bankers are worried they may become seduced by hard or soft promises to raise equity and that means dilution.

So keep an eye not on the sandwich but on the banker who may need to eat it.