The franchise sector took a few rating hits last week that could potentially dampen investor confidence in the sector, said a number of industry sources.
Just days after Moody's Investors Service downgraded three classes of Global Franchise Trust 1998-1, Fitch IBCA downgraded two separate Franchise Mortgage Acceptance Corp. trusts, FMAC 1997-C and FMAC 1998-A. Fitch had previously acted on the GFT deal as well.
"In terms of being able to get deals done, it will take a little more effort and ingenuity on the behalf of the investment banks," said Paul J. McCarthy, an analyst at Fitch. "We think that, so far the problems are fairly localized, but the franchise market is sort of in a state of flux because of the downgrades that have happened."
McCarthy added that the sector is not likely to be affected by a slowing economy going forward.
Though both sets of downgrades are related to recent borrower bankruptcies, the incidents are unrelated and the timing is coincidental.
In the GFT trust, it was recently found that Denny's franchisee Olajuwon Holdings, which has been operating in bankruptcy since January, came out of bankruptcy with insufficient funds to effectively maintain operations, and, according to a Moody's press release, "minimal recoveries from the underlying collateral are likely." It should be noted that Olajuwon Holdings, which is owned by the brother of Houston Rocket Star Hakeem Olajuwon, was not named in the press release.
Olajuwon loans make up 10% to 12% of the GFT pool.
Fitch's rating actions to the two FMAC trusts are the result of a similar incident, where a large debtor that recently came out of bankruptcy revealed substantial losses and is unlikely to continue effective servicing.
In a related development, Bay View Capital Corp., parent company of FMAC, recently announced that it has retained Merrill Lynch to assist it in "strategic alternatives," which implies the company has put itself up for sale, a source said.
"It could be a merger, they could join up with someone, but most times it's just a message saying, we're going to talk with someone to purchase the company,'" the source added.
Further, Bay View Capital Corp. announced that it's selling off Bankers Mutual, a $43 million mortgage unit of FMAC (which Bay View purchased last fall).