The Goddard Funding, 2022-1, will issue $392 million in asset-backed notes, and secure them with future franchise agreements, marking the early childhood education and care provider's entry into the asset-backed securities market.
The issuer, Goddard Funding 2022-1, will issue three classes of notes. The collateral pool will also include royalties and fees associated to franchise agreements on its national domestic network of 592 schools in 37 states, according to a pre-sale report from Kroll Bond Rating Agency.
Barclays Capital is the sole structuring advisor and book runner for Goddard Funding, which will issue the notes through three classes, according to KBRA. All of the Goddard schools are franchised, and the company's requirement that owners operate on site results in 82% of franchisees operating just one school, KBRA said, citing this as a potential credit positive.
"A highly franchised system is generally less operationally complex than a non-franchised business," KBRA analysts wrote, adding that such a setup "may be relatively easily transitioned and serviced in the potential event that company performance deteriorates."
The class A and class B notes in Goddard Funding will receive interest payments on a pro rata basis, while the class A-1 notes receive ultimate principal prior to the class A-2 notes, unless certain conditions are met, KBRA said. The senior notes benefit from an interest reserve account.
KBRA expects to assign ratings of 'BBB-' to all of the classes. Classes A and B have repayment dates of October 2027 and October 2029, respectively, and all of the notes have a final maturity date of October 2052.
Other forms of credit enhancement include a cash-trapping debt service coverage ratio. Should any quarterly payment date arrive and principal and interest debt service coverage ratio be less than 1.75x, then 50% of all excess cash flows will be deposited into the cash trap reserve account. Should the debt service coverage ratio be less than 1.50x, then the cash trap reserve account will receive 100% of the excess cash flows.
The transaction's notes also have a liquidity reserve, and a rapid amortization event.
Given the public's interest in the safety and well-being of children attending the schools, and potential backlash for reported incidents of harmful incidents, the company employs several tight operational controls over its locations. Franchisees are required to control building access with a range of devices such as locks, hand scanners and keypads.
Also, the company employs quality assurance teams to conduct unannounced audits twice a year to ensure that all protocols are being followed in areas such as classroom operations, playgrounds, administration, good service and transportation.
