Though loans used to fund acquisitions are often included in franchise deals, the use of them to build portfolios is on the rise, said a sector analyst.
"In the last year it's probably come up in four or five deals," the analyst said. "Before that it really wasn't used that much. It's probably going to be in every franchise pool from this point forward. That's why you're seeing the size of the franchise deals getting larger and larger."
Acquisition financing and securitization intersect when the proceeds associated with companies acquiring their competitors are used as assets backing a deal.
"In particular it's being used where you have a guy who operates, say, 50 Burger Kings outlets, and wants to buy a competitor of his who operates another 50 Burger Kings," the analyst said. "So he'll get a loan from [a franchise leasing lender] to finance the acquisition of a competitor, and then ultimately that gets into the asset-backed transactions as one of the concentrations in the asset-backed deal."
Kent Becker, however, a vice president at Moody's Investors Service said that acquisition financing has been at the core of franchise lending since day one.
"Going forward, the percentage of pools that are acquisitions could increase if interest rates rise as refinancing volume will dry up a bit," Becker said. "But acquisition financing has been a very common arrangement since the very start of the franchise loan era."
Rupert Chisholm, also of Moody's, said that the discrepancy might exist in what is and isn't considered acquisition financing.
When a deal is looked at by Moody's, there is a line drawn between refinancing and acquisition financing, whereupon the assets in the acquisition financing pool are backed by the target collateral and its revenue streams.
However, loans made to a franchisee for acquiring land or equipment is considered acquisition financing.
Though the "buyout" example, where a franchisee acquires stores from a competitor, and the purchasing of land example both fall under the umbrella of acquisition financing, the collateral is looked at differently, Moody's said.
