The Athlete's Foot Stores' recent bankruptcy filing is not expected to have a material impact on the shoe retailer's securitization backed by franchise fee revenues, sources familiar with the situation said. However, analysts at Moody's Investors Service are not taking any risks, and have placed the bonds on review for a possible downgrade.

The $30 million single-tranche 4.2-year offering came out of the gate with a rating of Baa3' from Moody's in Sept. 2003. The franchise operator announced that it would voluntarily liquidate roughly 120 of its more than 700 stores last month. All 120 stores are owned by a single franchisee, according to published reports. Of those 120 stores, 20 are responsible for the majority of the franchise royalties, said Robert D'Loren, president and CEO of UCC Capital Markets, the placement agent on the private securitization. "It is expected that those 20 stores will be converted to individually owned franchise stores," D'Loren said.

The roughly 600 remaining individually owned franchise stores will not be impacted, according to the Chapter 11 filing. Athlete's Foot has a debtor-in-possession facility in place with GMAC in order to facilitate the liquidation process.

The 120 stores affected by the liquidation account for about 15% of the cashflows backing the securitization, D'Loren said. Close to three-quarters of that 15% is derived from the 20 stores that will likely be converted. D'Loren maintains that the bankruptcy will ultimately be a positive for the deal.

"[The liquidation]will serve to eliminate concentration risk in the transaction, while converting the top producing stores into individually owned franchises," D'Loren said.

Moreover, without the rancorous, and lengthy, negotiations often associated with a restructuring, the process should be fairly quick and painless. Due to the relatively simple nature of the process, D'Loren does not anticipate a problem with the servicing, which is retained by UCC.

"The entire liquidation process should only take between 45 and 60 days, which is really only a one-quarter blip," D'Loren said. There are debt service coverage triggers embedded in the transaction, he added, however, none have yet been breached.

In the face of these rosy projections, Moody's is taking the cautious route, and is currently looking into the transaction. "The review will focus on the impact of the bankruptcy and the store closing on royalties paid to the asset-backed notes," Moody's analysts said in a release.

A statement issued by Athlete's Foot regarding the liquidation specifically noted the securitization. "The bonds issued...are not related to the Chapter 11 filing," company officials said. No further details were offered.

In addition to immediate concerns relating to the cashflows from the closed stores, industry observers question what type of affect this type of headline event could have on consumer perception of the brand. D'Loren expressed confidence in the resiliency of the trademark. "The [U.S.] franchise operation is actually growing," he noted. "Athlete's Foot already has an additional 320 stores in the pipeline under contract," D'Loren said.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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