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Franchise and other fees drive Servpro’s $260 million whole business securitization

Servpro Industries is preparing to issue $260 million in asset-backed securities (ABS) from the Servpro Master Issuer Series 2022-1, in a whole-business securitization of a property cleaning and restoration company.

Revenue attached to existing and future franchise and development agreements, product supply contracts, call center payments and intellectual property, plus other company assets, will secure the payments to the notes. Other assets include revenue attached to document restoration, vendor commissions, and franchise fees, according to a presale report from Kroll Bond Rating Agency.

Barclays Capital is expected to be the sole structuring advisor and sole book-running manager, with Midland Loan Services acting as servicer of the notes and the control party, according to KBRA, which expects to assign ‘BBB’ ratings to one class of notes under the 2022-1 issuance.

Among the transaction’s strong points is that the restoration and reconstruction services industry is expected to grow steadily at about 4% annually over the next several years. The increased frequency of extreme weather events, increased housing industry and property values and project costs is expected to expected to expand the $35 billion industry, KBRA said.

Servpro’s three largest sources of franchisor revenue are net royalties (56%), product and equipment sale (32%) and franchise fees, interest and other revenue (12%).

Also to the deal’s credit is the industry’s diverse franchisee base. Servpro operates through 942 franchisees operating about 1,923 locations across 50 states. On average, franchisees own about two units. Such diversity provides stability during periods of economic stress, creating a credit positive for the deal, KBRA said.

From a geographic perspective, California accounts for the largest state concentration, with 13.6%. Florida and Texas follow, with concentrations of 7.0% and 6.9%, respectively.

The deal is highly leveraged, however, with total debt capacity to net cash flow of about 6.7x, KBRA said.

In terms of structural protections for payment on the notes, Servpro utilizes cash sweeping triggers and rapid amortization events. If on any quarterly payment date the principal and interest debt service coverage ration (DSCR) is less than 1.65x, then 50% of all excess cash flows will be allocated to the payment of the outstanding principal amount of the class A-1 and class A-2 notes, KBRA said.

Rapid amortization could be triggered if, on any quarterly payment date, the transaction’s principal and interest DSCR is less than 1.20x, according to KBRA.

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