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Jack in the Box delivers expected refi effort via $1.45B whole-biz ABS

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A month after announcing plans to refinance its mounting debts through securitization, Jack in the Box has launched a first-time $1.45 billion bond offering supported by cash flow from franchise fees and revenues.

The Jack in the Box Funding LLC (Series 2019-1) trust will issue $150 million in variable funding notes and $1.3 billion in senior term asset-backed securities that will repay all of the company’s debts totaling more than $1 billion, according to a presale report from S&P Global Ratings.

Jack in the Box Inc. (Nasdaq: JACK) has 2,200 locations with flat same-store sales in recent years, and last December began talks with potential suitors to sell off the San Diego-based chain after management had come under pressure from franchisees for a turnaround strategy.

A top franchisee group of Jack in the Box franchisees even filed suit against the company last fall seeking the ouster of chief executive Lenny Comma and the board of directors.

But after holding discussions with potential buyers, the management team abruptly reversed course and announced on May 18 plans to drop sales plans and instead focus on securitization financing to repay a $315 outstanding term loan and $739.4 million outstanding under a $900 million revolving credit facility. (Both are unrated.)

Instead, Jack in the Box is sponsoring the sixth rated franchise-fee securitization of the year, and the second-largest behind Dunkin' Brands Group’s $1.7 million transaction that closed in March. Besides paying off debt, the securitization is also slated to provide excess cash proceeds for general corporate purposes.

S&P has assigned preliminary BBB ratings.

The new issuance will result in an increase in corporate leverage to 5.42x, down from 3.9x, but S&P considers than “relatively low leverage” to other quick-service restaurants that have tapped into whole business securitization (including Wendy’s International, Taco Bell and Domino’s).

Jack in the Box’s franchise base is approximately 2,100 of its 2,240 stores, or 94% of its entire business that is heavily concentrated in California and Texas (72% of systemwide sales). The company has steered its business increasingly to a franchise-based chain this decade, growing from a 76% franchise base in 2012.

S&P addressed the lawsuit filed by the National Jack in the Box Franchise Association, assessing it “unlikely” the dispute will “lead to substantial cash flow deterioration” in the deal.

In its legal complaints, the franchisee group complained the company withheld an audit of the corporate marketing fund and allegedly “mischaracterized” a tenant improvement contribution program that the group claims is shifting the company’s financial obligations to franchisees.

In addition, franchisees have complained that assigning property leases to the securitization would “impair” their franchise agreement rights, the S&P report stated. But thus far no defaults or delinquencies have been reported from franchisees and remodeling efforts at the franchisee stores remain on schedule.

Morgan Stanley is the bookrunner on the transaction, which is co-managed by Rabo Securities, Bank of America Merrill Lynch and Wells Fargo.

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Whole business securitization