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Dine Brands returns with $1.73B Applebee's/IHOP whole-biz refinancing

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Dine Brands Global is sponsoring a $1.73 billion whole-business securitization of casual dining operations of its Applebee’s and IHOP restaurant brands.

Dine Brands plans to use the proceeds to pay off notes from earlier franchise-fee ABS transactions, including all the outstanding debt from its debut $1.4 billion transactions in 2014.

According to S&P Global ratings, Applebee’s Funding LLC/IHOP Funding LLC Series 2019-1 will consist of $225 million in variable-funding notes and $1.5 billion in long-term asset-backed notes to pay down $1.284 billion of outstanding Series 2014-1 debt issued by the master trust, as well as up to $225 million in VFNs from the trust's Series 2018-1 issuance.

(Only $1.3 billion in notes has been formally proposed for the new series, but another $200 million in bonds are expected to be issued at closing and the VFNs fully drawn, according to S&P.)

The Series 2019-1 note payments will be made through the contribution of all royalties, fees, franchise lease payments and sales, plus intellectual property receivables from 3,652 Applebee’s Neighborhood Grill + Bar and International House of Pancakes franchise locations. (Dine Brands franchises about 98% of all Applebee’s/IHOP locations.)

The Applebee’s/IHOP notes are all BBB rated by S&P. The $225 million in Class A-1 notes and $650 million in Class A-2-I notes have anticipated five-year maturities, while the Class A-2-II notes will be due June 2026.

The new transaction follows up Dine Brand's last whole-biz deal from August 2018, when its trust issued the $1.57 billion Series 2018-1 notes. That was the first whole-biz securitization for Applebee’s/IHOP since the Dine Brand (formerly DineEquity Inc.) $1.4 billion debut 2014 issuance from the shelf.

Improved performance

The 2019-1 Series is being issued after more than year of improved systemwide sales performance for the two store brands, following declines in 2016 and 2017.

Both brands have had positive same-store growth in sales in 2018 and the first quarter of 2019.

The improvement at Applebee’s resulted from closing 175 underperforming stores the past two years, a “pruning” also aided by more product promotions, remodeling efforts at more than 92% of existing locations, menu improvements and optimized takeout options, according to S&P.

Applebee’s same-store sales were up 5% to $4.2 billion in 2018, as well as 5% in the first quarter of 2019 year-over-year. Royalty fees averaged 4% in 2018, an increase from 3.4% the year prior.

According to 2017 figures (the latest available industrywide), Applebee’s has been the largest U.S. casual dining chain for a decade in terms of systemwide sales.

IHOP holds that distinction in the family dining category, and increased systemwide sales to $3.2 billion last year, a 1.5% growth from 2017 (franchisee royalty rates were flat at 4.4%). Its first-quarter sales were up 1.1% from the first three months of 2018, as well.

IHOP restaurants have also undergone a revamp, with 939 locations having been “extensively” renovated since late 2015. The company has launched a mobile app and also introduced small-format IHOP store locations for airports, casinos, travel centers and universities.

Both brands are highly concentrated in large franchise groups. About 50% of Applebee’s stores and 31% of IHOP stores are operated by only five franchisees each; only 33 franchisee groups operate all of Applebee’s locations while 294 groups control U.S. IHOP locations.

The declining results in 2016 and 2017 prompted a review of the Series 2014-1 notes in late 2017, but S&P had affirmed the original BBB ratings of the series’ two classes of notes because of the stable debt-service coverage ratio for the older whole-biz deal. It had declined to 4.82x from its 2016 peak of 5.4x, but was “comfortably” above the a 1.75x DSCR level that would have triggered a partial cash trapping event, S&P reported in October 2017.

The store count between Applebee's and IHOP is evenly divided between the brands – 1,697 IHOP restaurants and 1,689 Applebee’s locations.

Credit Suisse and Barclays were the lead bookrunners on the new series issuance, with Barclays serving as the sole structuring agent.

Applebee’s/IHOP is the third whole-biz transaction of the year, and the second in the quick-serve dining category. Dunkin Brands Group sponsored an upsized $1.7 billion offering in March, a deal which priced at par with a coupon range of 3.787%-4.352% for three classes of notes, also rated BBB by S&P.

Also in March, Driven Brands sold $300 million in notes backed by the fee and license revenue of its various auto maintenance and lube center locations.

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Whole business securitization Credit Suisse Barclays