Domino's delivers another franchise fee securitization

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Domino’s Pizza, the restaurant and delivery chain owned by Bain Capital, is marketing $2.075 billion of notes backed by the fees and payments received from its network of more than 14,000 franchised stores across the globe, according to a presale report published Wednesday by S&P Global.

Domino’s Pizza Master Issuer LLC Series 2017-1 includes four classes of senior notes, all with a preliminary ‘BBB+’ ratings from S&P and maturities that range from July 2022 to July 2047:

The transaction is a whole business securitization: the operating assets are sold to various securitization trusts, eliminating much of the operating risk, and allowing the bonds to achieve a higher credit rating than debt issued by the parent company. In this case, the notes are supported by cash flow from royalty and license payments, as well as collateral involving intellectual property, distribution of profits, transaction accounts and equity interests in the Domino’s entities involved in the securitization.

The bonds are being co-issued by Domino’s, the master issuer and other related entities.

It's the company's first trip to the securitization market since 2015, and the largest transaction of this type since since DB Master Finance issued $2.6 billion in bonds in January 2015 backed by payments from Dunkin’ Donuts franchisees.

Domino's has fewer stores than Dunkin (14,000 vs over 18,000), but a larger international presence than either the doughnut chain or Wendy's, which has also done a whole business securitization. S&P noted that this creates a higher potential for cash-flow disruption and foreign currency exchange fluctuations. Of the 14,000 restaurants, over 8,600 are international locations.

But same-store sales growth remain on the rise, with a 9.8% growth in domestic sales and 4.3% in international.

Compared with Domino's and Dunkin transaction, the Wendy's system has a moderately high percentage of company-operated restaurants. "Having more franchised restaurants provides stability and less volatile cash flow, but it may not demonstrate Domino's having as much "skin-in-the-game," or being as strategically agile when compared with transactions with lower percentages of franchised stores," the presale report states.

The transaction is by far the largest of an active year for franchise securitization. At least five other franchise securitizations have closed or are currently being marketed, with a total volume of $4.85 billion.

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