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Driven Brands' next whole biz ABS includes a prefunding account

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Business is good, so Driven Brands is planning another whole business securitization.

Driven Brands, the parent firm for Maaco, Meineke, CARSTAR, 1-800-Radiator and Take 5 Oil Change, is issuing another $300 million of notes backed by the fees and income streams from the franchises. The transaction, Driven Brands Funding LLC 2019-1 Series, is the first whole- business securitization to include a prefunding account, according to rating agency presale reports. Of the total, $90 million will be used to finance the purchase of additional assets over the next year.

Another $30 million will be used to pay down a tranche of variable funding notes issued in a 2015 transaction; additional proceeds will be used to fund a payout to private equity sponsor Roark Capital Group.

It's only been a year since Driven Brands last tapped the securitization market, but increases in revenue have since driven its leverage, or debt to adjusted earnings before interest, taxes and depreciation, down to 5.5x from 6.3x, according to S&P Global Ratings. In its presale report, the rating agency said that issuing the additional $300 million of notes is expected to result in leverage increasing to 6.8x.

Kroll Bond Rating Agency sees leverage rising somewhat less, to only 6.2x; this takes into account Driven Brands acquisition of a 48-store chain of Super-Lube centers in five states last month.

Prefunding accounts are used in other kinds of asset-backed securities; typically, any new assets purchased are subject to eligibility requirements to minimize any credit deterioration in the overall pool. However, the only criteria for new Driven Brand assets are that they don't disrupt the minimum cash flow levels for the deal or breach the expected higher debt-to-EBITDA ratio resulting from the initial notes issuance.

Eligible assets can include current franchise-owned locations purchased from existing owners, or newly acquired maintenance and repair centers that will be converted to a Driven Brands franchise nameplate. (On its website, Driven Brands actively solicits the purchase of stores from its franchisees.)

Both S&P and Kroll expect to assign triple-B ratings to the single tranche of class A-2 notes to be issued, on par with their ratings for other term notes totaling $780 million issued in five prior deals.

At the end of 2018, Driven Brands operated approximately 2,500 locations in the U.S. and Canada, with 88% (or 2,283) franchise-owned stores.

The bulk of the 305 company-owned stores are Take 5 locations, which will contribute income streams into the trust (the handful of company-owned stores across other brands only pay royalty fees). Driven Brands has plans to expand franchising opportunities for Take 5 to reduce the share of corporate-owned in that brand, which is among four Driven has acquired during its regional auto-center buying spree since 2015.

Driven Brands, which has $2.6 billion in sales in 2018, has had 11% annual average growth in system-wide sales since 2010. Same-store sales growth was 5.5% in 2018, with the company’s individual store locations averaging $1.2 million in annual sales volume.

S&P notes that Charlotte, N.C.-based Driven competes in a highly fragmented market – in which the top six firms in the auto maintenance and repair sector make up less than 5% of a field filled with regional and “mom-and-pop” competitors.

The auto aftermarket industry, which includes an estimated 80,000 maintenance and repair centers in North America, is expected to grow 3.3% a year through 2020, according to a projection from a trade industry group (Auto Care Association) cited in Kroll’s report.

The 2019-1 Series deal is structured by Barclays Capital.

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Whole business securitization