SOUTH BEACH, Fla. - Canadian fast food chain A&W Restaurants is hoping to raise C$160 million with a unique hybrid securitization of the chain's franchise licensing fees, to be placed as retirement-fund bonds called income fund securities.
Experts on the intellectual property panel discussion at Strategic Research Institute's ABS Industry Summit pointed to this transaction as one of the latest developments in the Canadian markets: offering the upside of equity with the bankruptcy-remoteness of securitization.
A&W, an unrated chain with 750 restaurants nationwide, charges its franchisees 8% of their total yearly revenues in a licensing agreement. These fees were sold to a trust for C$160 million, which in turn is offering half of the total, or $80 million, as income fund securities. The bonds are then marketed to retail investors in Canada, with a return of between 8% and 12% - much greater than yields currently available on U.S. Treasuries.
While the securities are un-rated and panelists estimated A&W as a double-B credit, the true-sale status of the receivables in the trust is stronger than that of the U.S., as it is based more on British common law. "Unlike in the U.S., in Britain and Canada if you say in so many words, This is a sale [of assets],' then it is a sale," said Martin Fingerhut, partner at Toronto-based Blake, Cassells & Graydon LLP.
The equity upside of the transaction would be realized should A&W expand in the future with additional franchises - the licensing fees from which could theoretically be added to the trust.
As for this type of asset class developing in the U.S., Standard & Poor's I.P. analyst Bern Fisher was skeptical, noting that it would have to be proven that, should the A&W franchise falter and enter bankruptcy, a comparable competitor with a similar licensing agreement and without geographic cross-over would be able to purchase and service the trust.
With music royalty-backed bond inventor David Pullman moderating the panel, discussions did turn to the securitization of music catalog royalties. In particular, attendees were interested in the technological advances threatening the recording industry. Pullman noted that the record companies did eventually win the war, as all of the free services have either folded, or agreed to pay the royalty fees that back Bowie-type bonds.
He added that new ventures such as satellite and Internet radio also pay royalty fees, as do their FM counterparts. Pullman also noted the future for intellectual property is bright, citing a 1997 speech by Fed Chairman Alan Greenspan, in which he said the future growth of U.S. exports would come from intellectual property.
Pullman said new technology, DVDs for example, have contributed to major increases in catalog licensing revenues, as consumers update their film libraries with movies that pay fees for licensed songs, much like compact disks did for the music industry. For example, many consumers re-purchased Pink Floyd's The Dark Side of the Moon, which, Pullman noted, moved up significantly on the Billboard charts thanks to this phenomenon.
Also discussed was the possibility of securitizing the song libraries of Canadian pop stars Brian Adams, Alanis Morrisette and even Gordon Lightfoot - presumably with the closing dinner over an A&W cheeseburger.