As if it couldn't get any worse for the sector, securitizations from Enterprise Mortgage Acceptance Corp. (EMAC) were put on ratings watch negative by Moody's Investors Service last week, followed by downgrades to several series of EMAC trusts by Fitch.

Fitch also lowered ratings on various classes on deals from Franchise Mortgage Acceptance Corp. (FMAC), all of which could make it even more difficult for a prospective issuer to bring a deal in the near term, sources said.

However, sector-standout Franchise Finance Corporation of America is looking to brave the rapids later this year, targeting the third or fourth quarter, said Christopher Volk, president and chief operating officer at FFCA.

According to Volk, the deal will likely resemble FFCA's $370 million transaction in November, which featured a triple-A wrap from MBIA. The company will consider using insurance this year as well.

"We did a surety wrap on our deal last year to enhance investor confidence in the sector and our ability to originate a quality product," Volk said. "And it also broadened the investor base for the triple-A classes."

Although Volk said it was too early to name a mandate, FFCA has worked with Morgan Stanley Dean Witter as lead manager on all but one of its five deals since 1996, according to Thomson Financial Securities Data.

Troubled waters: two lending models

Despite a potential deal from FFCA, a company the market practically depends on - no franchise deals yet this year - investors are growing more wary of headline events.

"For investors, EMAC might be the last straw," said one industry observer. "With the first disappointments, you could just say that the issuers were outliers. But at some point, the entire market can't be outliers."

Franchise-backed bonds are understood to be trading at distressed levels.

However, proponents of the industry stress the distinction between the two different loan underwriting models used by franchise lenders. The lenders who have had the most volatile securitizations are known for having lent against business valuations, as opposed to lending against real estate.

According to commentary in Credit Suisse First Boston's March issue of Market Tabs, recovery rates in real estate-based franchise lending can be expected to range between 60% and 80%, compared to recovery rates of 5% to 20% in enterprise/business-value lending. The low recovery in business valuation assumes that there is no successful workout. Franchise lenders are often able to reduce severities by swiftly replacing the operator, CSFB said.

In the EMAC instance, Moody's said that 28% of the 1991-1 pool was delinquent by principal balance, and approximately 20% of the 2000-1 deal is delinquent.

An insider said that much of the portfolio deterioration in both pools is tied to the default of one borrower, an owner of Convenience USA concepts. The default accounts for 16% of the 28% default rate in the 1999-1 series, the source said.

The outlook: dark cloud or sunshine?

As FFCA contemplates bringing a deal, the company is no doubt hoping the market factors in the different types of lending methodologies.

"We've always been concerned about being painted with the same brush, but we think that our record sort of speaks for itself," said FFCA's Volk. "We've specialized in heavily structured transactions with a large focus on real estate collateral, which is distinctly different from the business valuation approach that was employed by some of the other folks."

GE Capital recently agreed to purchase FFCA for $1.4 billion plus the assumption of $700 million in debt, at which point Fitch placed FFCA's corporate debt rating on watch for upgrade. Without GE Capital, FFCA had already been an investment grade corporation, which would have allowed them reasonable funding outside of the franchise ABS market, an analyst said.

EMAC recently announced it would implement staff reductions, shedding its origination business, citing "financial market uncertainty in the franchise loan sector and rising delinquency rates among borrowers in the sector" as the primary drivers in its business realignment.

It is understood that EMAC had no securitization imminent, although the company is currently servicing a portfolio of its own unsecuritized loans. EMAC has been in the market three times since 1998, for approximately $1.1 billion in proceeds.

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