FOCUS Brands Funding is preparing to issue $240 million through a whole business securitization, where revenues from franchise and development agreements, company-operated location royalties, plus licensing fees and other corporate assets will provide the revenue to secure the notes.
The transaction actually has two co-issuers—FOCUS Brands Funding and Jamba Juice Funding—that will contribute assets to the trust that also includes certain vendor payments and fees and intellectual property, according to a pre-sale report from Kroll Bond Rating Agency. Those assets are tied to restaurant brands including Auntie Anne's, Carvel, Cinnabon, Jamba and McAllister's Deli, KBRA said.
The transaction, FOCUS Brands Funding 2023-2, will issue A1 and A2 notes. It has a final maturity date of October 2053, and carries a KBRA rating of 'BBB," the rating agency said. Among the deal's positive credit considerations is a diversified pool of brand assets, a broad franchisee base and geographic diversity.
KeyBanc Capital Markets and Rabo Securities are co-managers on the deal, according to the rating agency.
Some 1,770 operators comprise FOCUS Brands' franchisee base, with 95% of them operating 10 or fewer units, and about 80% of the franchisee base owns one or two units, the rating agency said. When a franchise base is large, it gives the transaction more flexibility to transfer cashflows from one operator to another should the company's performance deteriorate.
FOCUS Brands has locations in all 50 states and the District of Columbia, as well as 61 countries and territories. Texas and California account for the largest percentages of units, at 10.4% and 8.7%, respectively, while each remaining state accounts for less than 6% of the total locations.
As much as the pool is diversified by brand, they all face a similar pressure. Many service-based industries have had trouble hiring and retaining qualified personnel to staff the restaurants, creating operational challenges, KBRA said. Further, at least two brands have significant exposure to enclosed malls, a sector that has been under operational pressure for years. Malls comprise 60% of systemwide sales (SWS) for Auntie Anne's and Cinnabon combined, as well as 6% of Jamba's domestic SWS.
FOCUS Brands Funding 2023-2 also benefits from several key credit enhancements. For one, classes A1 and A2 receive interest pro rata while the class A1 notes receive principal before the A2 notes, unless certain conditions are met. Other enhancements include a cash-sweeping debt service coverage ration (DSCR), and a cash-trapping debt service coverage ratio. If, on any quarterly payment date, the DSCR reaches a certain point between 1.50x and 1.75x, then 50.0% of all excess cash flows will be deposited into the cash trap reserve account. There is also a rapid amortization event, which will be triggered under certain conditions.
