Dunkin' Brands is looking to raise $2.3 billion in a whole business securitization that will use the proceeds to repay debt from previous master trusts, and potentially distribute proceeds to shareholders of its parent, Inspired Brands Inc.
The transaction has higher leverage that aims to repay two earlier asset-backed securities (ABS) deals as well as support the potential spinoff of parent company Inspire Brands by its private-equity owner.
The DB Master Finance LLC, Series 2021-1, transaction is split into three tranches, each $783 million and rated BBB by KBRA and S&P Global Ratings, with anticipated maturities of five years, seven years and 10 years.
Proceeds from the currently deal are slated to repay notes from a $1.4 billion ABS in 2017 and a $1.7 billion securitization in 2019. They also carried BBB ratings from S&P Global across all the tranches, according to Finsight, with pricing on the three tranches of the 2019 deal sold to investors pricing well below initial pricing guidance.
Barclays Capital will act as sole structuring agent on the current deal and retain the position of join lead that it held on the earlier ABS transactions.
The WBS will be secured by “substantially all of the assets of the master issuer and guarantors,” according to S&P Global, including existing and new franchise and development agreements and the related payments; securitization intellectual property (IP) and IP license agreements; and existing and new owned real property and franchisee lease payments.
KBRA notes the deal’s leverage of 6.6 times, as measured by total debt capacity to securitized net cash flow, that is higher than several recent KBRA-rated WBS in the restaurant sector. It adds, though, that the higher leverage is supported by Dunkin’ Brands' relatively strong business profile and the stability of its topline revenue, which includes recurring franchise royalties and fees, and lease payments and license income that are typically less volatile than other cash flows.
The Dunkin’ Brands system has been 100% franchised since 2016, the highest percentage among the securitized restaurant systems that S&P Global rates.
“We believe a high franchise percentage provides the transaction with better cash flow stability and independence from the manager … ,” the rating agency says.
S&P Global also notes several potential credit weaknesses, including international operations that are not hedged in the event of foreign currency fluctuations; geographic concentration, with the three largest states accounting for 33% of the company’s stores; and low same-store sales growth prior to the pandemic.
Should revenues fall and the debt service coverage ratio falls below specified thresholds, the deal provides a cash trap reserve account in which 50% of all excess cash flows are deposited.
If on any quarterly payment date, the principal and interest DSCR is less than 1.20x, or if certain other triggers are breached, the notes will be subject to a rapid amortization event, KBRA’s report says.
Inspire Brands is majority owned by affiliates of Roark Capital Group, an Atlanta private-equity fund that since its inception in 2001 has acquired 95 franchised or multiunit brands generating $54 billion in sales across the U.S. and 89 countries. Roark has pursued securitizations through other holdings including Arby’s, CKE Restaurants, Driven Brands, and FOCUS Brands.
