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CKE refinancing Hardee's/Carl's Jr. whole biz ABS to fund dividend

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CKE Restaurant Holdings is tapping the securitization market to refinance its existing debt and potentially fund a dividend payout to its private equity sponsor Roark Capital.

The restaurant franchisor is marketing up to $1 billion of term notes backed by revenue from domestic and international franchise agreements along with royalties from real estate, franchisee license, intellectual property, as well as cash flow from a small portion of corporate-owned Hardees and Carl's Jr. franchises, according to Kroll Bond Rating Agency.

Proceeds will be used to refinance the remaining balance of $1.1 billion transaction completed five years ago, in 2013, when CKE was owned by another private equity firm, Apollo Global Management.

The new offering consists of $70 million of class A1 variable funding notes (which are similar to a line of credit and are generally used for working capital) and three tranches of Class A-2 notes totaling $930 million: $310 million maturing in June 2022, $310 million maturing in June 2025, and $310 million maturing in June 20208. The amount of Class A-2 notes to be issued can upsized to as much as $1 billion. Anything left over after repaying the original notes will be available for general corporate purposes, including an equity distribution to CKE shareholders, according to Kroll.

Barclays Capital is the sole structuring advisor and sole book-running manager.

Kroll has assigned preliminary BBB ratings to all of the notes, which is one notch higher than the BBB- rating that S&P Global Ratings gave to the 2013-1 transaction.

Whole-business deals have traditionally been sponsored by quick-serve restaurant chains, but retail brands and even maritime logistics firms have joined in the trend of handing over operations to investors in the past two years. CKE's deal is the fifth whole-business transaction of 2018, bringing total volume to more than $2.8 billion.

CKE is assigning all operational and royalty revenue to the two co-issuers – Hardee’s Funding and Carl’s Jr. Funding – representing the respective brands among the 3,878-store burger chains in 44 states and 43 countries.

The Class A-2 notes will amortize at 1% a year. The transaction also has cash-trap triggers protecting investors against falling debt-service coverage ratios (50% of excess cash flow if the DSCR falls between 1.5x-1.75x; 100% if below 1.5% - alongside a rapid amortization trigger for DSCR’s below 1.2x).

The CKE restaurant system, the fifth-largest hamburger quick-serve restaurant worldwide, has annual systemwide sales of $4.4 billion. According to Kroll, approximately 74% of CKE revenue is derived from royalty payments, the remainder from corporate-restaurant profits and net rental income, according to KBRA.

Since CKE’s initial dive into whole-business securitization, it has divested of much of its corporate ownership of individual stores: the 73% of franchise-owned stores in 2013 is now over 96%. The company’s partner base consists of 353 long-term franchisees (with an average relationship of 22 years with CKE), which own an average of 10.5 stores apiece.

Kroll says having a greater concentration of franchised stores is generally a positive aspect for whole-business securitizations, given the “stable” stream of royalty cash flow “that is more transferable if the Company’s performance deteriorates.”

Roark acquired CKI just months after the company completed its original securitization. The private equity firm is well versed in these kinds of transactions, which it has used to finance other portfolio companies: Jimmy John’s, Arby’s, Driven Brands and FOCUS Brands.

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Whole business securitization