If Spirit Finance Corp.'s recent filing with the Securities and Exchange Commission (SEC) is any indication, a new ABS player may emerge in the franchise sector, albeit with a familiar face.

Spirit Finance, a real estate investment trust, formed in last August, is planning a roughly $374 million initial public equity offering. At the helm is industry veteran Morton Fleischer, founder and CEO of Franchise Finance Corp. of America (FFCA), which was acquired by GE Capital Corp. in 2001.Christopher Volk, who served as president and chief operating officer at FFCA, has joined Fleischer in his latest venture as president and COO at Spirit. Also on board are several other FFCA and GE alumni.

The IPO is slated for the second half of 2004, the company said in a release. According to the prospectus, Spirit "may acquire properties for the purpose of securitization or use similar structured finance alternatives."

The company remains mum on its plans for the term ABS market in observance of the quiet period following the announcement of the IPO. However, senior management's track record is a telling testament. Prior to being bought by GE, FFCA was a bellwether issuer in the franchise sector, valued for prudent underwriting. While FFCA deals were ultimately felled by exposure to the convenience and gas sector, the issuer managed to hold up better than its peers in the face of problems that have dogged the entire sector.

Spirit is homing in on single tenant, operationally essential real estate held by large corporations in the retail, distribution and service industries such as discount retailers, department stores, drugstores, supermarkets, restaurants and warehouse or wholesale clubs. The management team expects the average dollar amount of the transactions at Spirit to be larger than those completed by FFCA, the filing noted.

As of June 7, Spirit's portfolio totaled roughly $107 million, comprised of 83 properties in 17 states throughout the U.S. The properties include four interstate travel plaza facilities, restaurants, auto parts properties and a powersports vehicle dealership, among others. In addition, the company had agreements pending on roughly $404 million of real estate consisting of restaurants, travel plazas, petroleum and educational facilities, movie theatres and retailers. Another $1.3 billion in real estate had been identified for review bringing the pipeline for potential acquisitions to approximately $1.7 billion.

In January, Spirit received $360 million private equity funding via Banc of America Securities as sole purchaser. The company is in the process of finalizing a secured debt facility with Bank of America for a potential maximum amount of $350 million.

Meanwhile, the franchise sector has been quiet of late, and looks to remain that way in the foreseeable future, said Ellen Welsher, managing director and head of new assets at Standard & Poor's. Her firm has yet to rate a franchise deal in 2004. "A lot of companies shuttered their origination entities and transferred servicing to alternative servicers," Welsher said.

"Some investors hear the word franchise and there are other things they would prefer to look at," she added.

Moody's Investors Service Senior Vice President Michael O'Connor said that the only term franchise transaction to be completed this year was a $300 million offering from McDonald Corp.'s Golden Funding conduit. "Performance has been a big issue. There have been more defaults than what would be expected and much more volatile recoveries," O'Connor said.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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