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Domino's returns with $825M franchise fee securitization

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Domino’s plans to market $825 million in a new series of master-trust notes backed by franchise fees and revenues; proceeds will be used to pay down $491 million of existing asset-backed securities and fund a possible shareholder dividend of up to $323 million.

The Domino’s Pizza Master Issuer Series 2018-1 offering consists of two tranche of notes: $400 million of Class A-2-I notes with 4.25% coupon with an expected October 2025 maturity, and $425 million of Class A-2-II notes due July 2027 with a 4.35% coupon.

The transaction is a whole-business securitization, with Domino’s selling its operating assets into the master and three co-issuing trusts that will sell bonds backed by the 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.

The transaction allows Domino's to raise money more cheaply; the notes carry preliminary BBB+ ratings from S&P Global Ratings, which is the highest of any whole-business securitization rated by S&P, including Wendy’s, Sonic, Dunkin’ Brands, Applebee’s/IHOP and Yum Brands’ Taco Bell.

According to S&P Global Ratings, $491 million of the proceeds is expected to repay ABS debt - including the balance of last year’s Series 2017-1 Class A-1 variable-funding notes, while the remaining $323 million will be assigned for general corporate purposes.

S&P based its ratings on Domino’s strong revenue growth (8.5% annually since 2007), its 15% growth rate in new-store openings for the past decade, as well as its longevity (founded in 1960). U.S. franchisees have reported positive same-store sales in 17 of the past 21 years, and international locations have experienced positive same-store sales for 24 consecutive years.

In February, the Ann Arbor, Mich., company reported a third straight year of double-digit sales growth, with 11.7% for 2017; revenue growth was 8.8%.

Domino’s (NYSE: DPZ), which is owned by Bain Capital, is also strongly diversified, with the largest franchisee having only about 3.6% of all domestic stores and 1.6% of sales, according to S&P.

The bond payments will be made from cash flows from franchise royalty and license payments, rental income and profit distribution arrangements from the 14,856-store system.

After the issuance of the 2018-1 series, Domino’s leverage will remain at 6x debt-to-EBITDA. As a debt issuer, that would nominally place Domino’s into the realm of speculative-grade borrowing, but the whole-business structure allows Domino’s to issue debt at an investment-grade level by pledging the proceeds of franchise revenue into the master-trust-like structure.

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Whole business securitization