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Fatburger parent plans $40M whole-biz securitization

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The parent company of Fatburger and Ponderosa Steakhouse plans a debut $40 million offering of bonds backed by the franchise-fee revenue of the various chains in its fold.

FAT Brands (Nasdaq: FAT) is proposing a short-duration whole-business securitization to ABS investors that will defer nearly all franchise revenue and royalties from approximately 400 restaurants under eight different brand names controlled the Beverly Hills, Calif.-based fast-casual chain operator.

The proceeds will go toward reducing the company's high net leverage of 7.7x and boosting its debt-service coverage ratio.

The deal is much smaller than typical whole-business trust issuance by national chains such as Wendy’s and Domino’s. It also has a provisional senior note rating of BB from DBRS Morningstar that is lower than the triple-B rated deals of most larger and more established issuers of whole-biz deals.

But like other issuers, the highly leveraged FAT Brands will still benefit from lower-cost debt financing by obtaining an investment-grade rating for the securitization that is backed by the company's full revenue streams.

According to a Jan. 13 investor presentation, FAT Brands anticipates a 200 basis point spread on the senior notes, "relative to other recently rated issued whole business securitizations." The subordinate notes expect to be priced at a spread of 250 basis points over the final senior-note pricing.

After the securitization bonds are sold, FAT Brands will reduce its current 7.7x leverage ratio to 3.5x after paying down a $24 million secured term loan and $10 million in unsecured Series A Preferred notes that carry a 9.9% coupon. The company will also boost cash reserves to $4 million.

According to the investor presentation, FatBrands reported third-quarter 2019 revenues of $22.3 million and earnings of $6.4 million, each figure representing a 10% increase from the second quarter. The company, which went public in October 2017 to raise $24 million, has a market cap of $54 million.

Global franchise company Fog Cutter Capital Group, of Portland, Ore., holds 81.6% equity in FAT Brands.

“The multibrand franchisor model enables [FAT Brands] to scale the number of restaurant locations with limited incremental corporate overhead and reduced exposure to store-level risk, such as long-term real estate commitments and increases in employee wage costs,” stated the presale report from DBRS Morningstar.

The transaction structure consists of a fixed-rate $1 million Class A-1 tranche and a $19 million Class A-2 tranche; plus a $1 million Class B-1 and $19 million Class B-2 offering with preliminary B ratings from DBRS Morningstar.

The smaller A-1 and B-1 tranches have anticipated repayment dates of 1.5 years and a weighted average life of 1.1 years, while the Class A-2 and B-2 notes will be paid down within approximately 2.5 years and 3.5 years, respectively.

The A-1/B-1 notes will receive interest-only payments during the six-month noncall period; the A-2/B-2 notes will received scheduled amortization payments and excess amortization cash flow following a 12-month non-call/interest-only period. If any of the notes are not paid by the expected final legal maturities, a 100% cash-flow sweep would be triggered.

Fat Brands has franchisees in 20 states and in approximately 20 countries, with about 75% of its franchise base in the U.S. Its franchised chains include Fatburger, Buffalo’s, Buffalo’s Express, Ponderosa Steakhouse and Bonanza Steakhouse, Hurricane Grill & Wings, Yalla Mediterranean, and Elevation Burger.

The company plans to add 200 more stores of its various brands, as it competes with other fast-casual burger joints such as Shake Shack, Habit and Smashburger, according to DBRS Morningstar’s report. FAT Brands also plans to continue to acquire new brands and concepts that will be part of the franchise expansion.

Fatburger is FAT Brands’ signature franchise with 164 locations, along with 92 co-branded locations with Buffalo’s Café and Express.

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Whole business securitization
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