The planned $1.5 billion asset backed securities offering to finance the $2.43 billion purchase of Dunkin' Brands Inc. from Pernod Ricard by Bain Capital, Carlyle Group and T.H. Lee Partners is indicative of the increased role of intellectual property in acquisition financing.
The issuance will be secured largely by the proceeds from Dunkin' Brands franchises, which include over 12,000 Dunkin Donuts, Baskin-Robbins and Togo's stores, though there will be some real estate involved. Moody's Investors Service has not yet rated the deal.
The use of franchise royalties as collateral is highly unusual, analysts say. Arby's used its franchising rights to raise $290 million in 2000, and very few issuers have followed. Quizno's issued ABS using franchise royalties last year in a private deal, according to two analysts, but no details could immediately be obtained.
Several issuers have attempted to employ this structure since 2000, but none have been able to jump the considerable hurdles that stand in the way of bringing such an issue to market, said Michael O'Connor, head of ABS credit at West LB, and a former Moody's analyst who rated the Arby's deal. O'Connor declined to provide specifics on those attempts, though he noted some were acquisition financings.
"It's a long, hard process, and it ties up the company in a way many companies don't want to be tied up. You're essentially turning over your major source of income," O'Connor said.
Investors also have to be made comfortable with the fact that a downturn in the company's business will not jeopardize the collateral. And an important question to be answered is who will run the company in the event of a default?
"You are duplicating the company and have to be able to analyze that. With a loan it's easy. You just ask, What's the probability of default?' That's easier than to think, Let's see, for the next 10 years I get 8% of the revenues from 12,000 different stores spread out all over the country,' " O'Connor explained.
A further complication is that franchise laws vary by state, so the deal will presumably have to navigate an additional 50 regulators.
"What you end up with is the special purpose vehicle being the franchisor, and once you do that you have to comply with whatever state laws exist. It gets tricky," O'Connor said.
The Arby's deal has performed very well since it came to market in 2000, O'Connor said.
Perhaps because of the complications involved, Arby's had its deal insured, or "wrapped," by AMBAC. In the event of a default, investors would be paid by the insurer. It was not determined whether the Dunkin' Brands deal will be wrapped.
O'Connor was not familiar with the specifics of the Dunkin' Brands deal, but he suspected the issuers had already overcome a good number of obstacles since news of the planned issue had already hit the marketplace.
In addition to the franchise model, other uses of intellectual property as collateral in securitizations include music copyrights, patents and apparel trademarks.
Fitch Ratings expects more intellectual property securitizations, noting the huge potential for raising capital - $500 billion, by some estimates, it noted in a recent report. And the ABS market is increasingly gaining favor as a tool in acquisition financing, Kevin Duignan, head of the ABS group at Fitch, noted. Last year, sponsor groups used ABS in the $4.3 billion acquisition of Hertz and the $6.6 billion Toys R' Us buyout.
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