Dine Brands Global, the parent company of Applebee’s and IHOP, is refinancing $1.29 billion of bonds backed by franchise fees that it issued four years ago, taking on more debt in the process.

The company, formerly known as Dine Equity, is issuing $225 million of variable-funding notes and $1.350 billion in term asset-backed securities in a transaction called Applebee’s Funding/IHOP Funding series 2018-1. All of the notes carry preliminary BBB ratings from S&P Global Ratings.

Proceeds from the offering will be used to repay approximately $1.29 billion of outstanding 2014-1 series term notes and variable funding notes, to pay transaction fees and expenses, and for general corporate purposes.

Barclays is the sole structuring adviser and lead left bookrunner; Credit Suisse is the lead right bookrunner.

The series 2018-1 note issuance will result in an increase in leverage to approximately 5.9x from 5.7x on a total debt/adjusted EBITDA basis, according to S&P.

The new transaction comes just months after one of the five biggest Applebee’s franchisees, RMH Holdings, which operated 146 stores, filed for bankruptcy. S&P did not comment on the impact of the bankruptcy filing in its presale report, except to note that it did not take any rating action on the series 2014-1 notes at the time.

Elsewhere in the presale report, the rating agency cites Dine’s concentrated franchisee base as a positive. Some 50% of Applebee's stores and approximately 30% of IHOP stores are operated by only five franchisees each. Approximately 35 franchisee groups operate the Applebee's restaurants in the U.S., and approximately 296 franchisee groups operate the U.S. IHOP locations.

S&P also noted that it had affirmed its BBB ratings on the series 2014 notes late last year, following several quarters of declining same-store sales. “Management attributes the 2016/2017 performance to company transitions, especially for Applebee's, as well as recent strategic initiatives driving foot traffic, such as product promotions, remodeling, menu improvements, digital marketing initiatives, and optimization of takeout,” the presale report states. And the sales momentum has turned positive in the first two quarters of this year.

S&P also pointed to an increased store closures and a decline in the average royalty rate over the past two years due to the planned pruning of underperforming Applebee's units, which were, according to the company, not being routinely weeded out of the system in the past. The company has reduced store count by approximately 60 units thus far in 2018 and expects another 20-30 domestically, to be closed by the end of the year.

Currently, the transaction includes no senior subordinated or subordinated notes; however, the transaction may issue these notes if certain conditions are met.

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