McDonald's Corp., the world's largest restaurant company, told some U.S. franchisees to seek other ways to finance store improvements after Bank of America Corp. declined to increase lending.
Store owners have exhausted financing used to pay for upgrades and equipment to make lattes and espressos, and Bank of America won't provide more money as it works on the planned purchase of Merrill Lynch & Co., McDonald's said in a memo that was obtained by Bloomberg News.
Banks have tightened credit after Lehman Brothers Holdings Inc.'s bankruptcy filing and the government takeover of Fannie Mae and Freddie Mac resulted in more than $500 billion in writedowns and losses. Bank of America's reluctance to increase the loan may show that even well-known brands such as McDonald's face difficulties financing expansion.
"This is the first signal that turmoil in the financial markets is reaching McDonald's," Richard Adams, a former McDonald's franchisee in San Diego, said in a telephone interview. He's a consultant to about 300 of the company's franchisees and said he had spoken with someone who's seen the memo.
A stronger coffee blend introduced in 2006 lifted U.S. sales as consumers buying coffee also purchased breakfast foods. McDonald's wants to sell lattes, mochas and other beverages at its almost 14,000 U.S. restaurants by the end of 2009 as it seeks to win customers from Starbucks Corp., and is working with franchises to install the necessary equipment.
"Bank of America has been taking steps to increase capacity to fund additional growth," McDonald's Treasury Department wrote in a memo that was forwarded Sept. 19 by Pete Zelasko to franchisees in the Rocky Mountain region of the U.S.
"Its announcement last weekend of its intention to acquire an investment bank and the volatility in the debt markets, especially this past week, have impacted B of A's ability to get the quick solution originally anticipated," McDonald's wrote.
Zelasko didn't respond to an e-mail request for comment. A message left for him at a McDonald's voice message box identified as his wasn't returned.
McDonald's spokesman William Whitman declined to verify the memo's authenticity.
"McDonald's beverage strategy is on target and progressing as planned," Whitman said. "The company and our franchisees are aligned and excited about this opportunity and what it means for McDonald's and our customers."
Bank of America, which is based in Charlotte, North Carolina and is the largest U.S. lender to consumers and small businesses, doesn't comment on specific customers, spokesman Scott Silvestri said.
McDonald's memo coincided with last week's efforts by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke to stabilize U.S. financial markets.
The credit crisis, precipitated by loan defaults in the worst housing market since the Great Depression, has forced other companies to adjust borrowing. General Motors Corp. said Sept. 19 that it's tapping the remaining $3.5 billion of a revolving credit line to cover restructuring costs.
"The world seems more turned upside down this week than I've ever seen," Irwin Kruger, a 60-year-old franchisee of four McDonald's stores in Manhattan, said in a Sept. 19 interview. The restaurant company is "sending out a warning shot to franchisees" that they need to consider other lenders.
McDonald's, based in Oak Brook, helps set up bank loans to franchisees 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 of lattes, mocha and other specialty coffee.
Merrill, based in New York, also provides financing for McDonald's franchisees.
Janna Sampson, who helps manage 268,216 McDonald's shares at Oakbrook Investments in Lisle, said Bank of America may slow lending until it determines how much it and Merrill are collectively loaning franchisees.
"As it looks at the two loan books together, Bank of America may decide it has enough exposure," Sampson said. "Even though McDonald's has been a strong performer, the restaurant sector is exposed to the economic downturn, and Bank of America may think we're not through the financial crisis yet."
A slowdown in lending "is probably a momentary hiccup" in the coffee expansion, Sampson said. "We're probably talking weeks, not a quarter." Oakbrook Investments manages $1.4 billion.
McDonald's is "identifying new sources of liquidity and loan programs for our franchisees" and expects to make announcements within the next several weeks, according to the memo.
Financial markets "are very resilient," McDonald's said. "We have seen previous periods of financial volatility, uncertainty and consolidation in the past with events such as the Russian crisis in 1998, 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 next two months.
About 99 percent of U.S. outlets are selling iced coffee and more than two-thirds are selling sweet iced tea, McDonald's spokesman Whitman said Aug. 28. McDonald's had 13,845 U.S. restaurants, with more than 2,000 selling espresso, as of June 30, he said.
The addition of frappes, smoothies and bottled beverages starting in 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 8.5 percent in August compared with a year earlier, helped by an 11.6 percent gain in Europe and the dollar's decline against other currencies, McDonald's said Sept. 9.
August sales in the U.S. advanced 4.5 percent after almost a third of domestic restaurants sold large sodas and sweet iced tea for $1, part of the chain's emphasis on discounts that's also drawing customers overseas.
Franchisees should use excess cash to pay down loans, buy new equipment 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 loans based on interest rates," the memo said. "Apply early. The lending community is currently working overtime."