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Investor appetite for whole biz ABS is growing

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There’s been a broad expansion in the investor base for one of the more esoteric corners of structured finance, the whole business securitization.

Over the past several years, many well-known restaurants brands, and even some nonrestaurants, have securitized their franchise fees and other revenues streams in order to lower their funding costs. Some $5.1 billion priced from seven issuers through the first six months of the year, up 84% year over year and on pace to break the record $7.2 billion issued in 2015, according to Kroll Bond Rating Agency.

Panelists at an industry conference in Miami offered several reasons for the success of these transactions, which come as the U.S. restaurant industry grapples with a decline in foot traffic and same-store sales growth.

The bankers and lawyers who put these deals together have been working hard to broaden their appeal. Cory Wishengrad, head of structured products origination at Guggenheim Securities, ticked off a few examples: a 2015 deal by Dunkin' Brands included a four-year tranche, which he said appealed to a lot of money managers. By comparison, insurance companies have traditionally been the biggest buyers in this asset class.

And a transaction by Domino’s this year included the first floating-rate tranche of notes, which Wishengrad said appealed to yet another group of buyers.

These kinds of innovations are paying off, he said. When Dunkin' came back to market this month with another $1.45 billion transaction, the number of participants was roughly double that of the 2015 deal.

Orders for the deal topped $5 billion, he said. Domino’s $2.075 billion transaction in June was also oversubscribed, attracting over $8 billion of orders.

“By any measure, the size of investor participation in the market has grown significantly,” Wishengrad said at IMN’s ABS East conference.

Liquidity in the secondary market has also improved, according to the investment banker. In August, $500 million of bonds changed hands via 133 transactions, an increase of 50% over July, when there were 94 trades totaling $322 million.

Some of the biggest deals, like Domino’s and Dunkin', saw over $100 million in trades in August alone. That’s equivalent to 3% of bonds outstanding changing hands in a single month.

Benjamin Fernandez, a managing director at Barclays, and another panelist noted that there has been a similar increase in investor interest in other nontraditional kinds of structured finance.

However, in the case of whole business deals, many of the new buyers are crossover investors who previously invested in general obligation debt issued by the same companies, Fernandez said.

“You have a dynamic where the availability of [investment] product for highly franchised companies is now highly concentrated in one financing source,” he said. “These are credits that have long been traded in the [corporate loan] and [unsecured] bond markets. [Investors] are familiar with them, and they like them."

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Esoteric ABS