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Jack in the Box looks to securitization in turnaround strategy

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Jack in the Box plans to tap the securitization market to refinance debt in its turnaround efforts after dropping plans to find a buyer for its 2,200-store franchise.

In an announcement prior to Thursday’s second-quarter earnings release, the San Diego-based fast-food franchise that it “intends to implement a new capital structure in the form of a securitization,” rather than continue talks with potential buyers to take over the chain.

Jack in the Box (Nasdaq: JACK) has struggled with flat store sales as well as an open revolt from its largest franchisee group that has called for new ownership and management of the 21-state regional chain.

Jack in the Box instead will now turn to investors to help refinance its existing senior credit facility – including a term loan and revolver – through a securitization that will also generate a cash return to shareholders, according to the company.

The release did not detail the securitization structure the board and management intend to pursue, and the company did not return calls on Friday to Asset Securitization Report.

Approximately 2,100 of the chain’s 2,200 stores are franchise-owned.

Many quick-serve restaurants with deep franchisee bases use the whole-business securitization model, in which proceeds from operational revenues plus franchise and royalty fees are used to pay notes issued via a master trust to investors. Taco Bell, Wendy’s, Sonic Corp., Arby’s, Hardee’s/Carl’s Jr., Domino’s, and Jimmy John’s are among over a dozen quick-casual chains that have tapped the whole-biz capital structure to finance operations, expansion, acquisitions and dividends in the last few years.

The company will have a target leverage ratio of approximately five times EBITDA, according to corporate filings with the Securities and Exchange Commission.

Same-store sales had been flat in recent years, including for the past seven months and up less than 1% in the first quarter ending April 14, according to the company’s earnings report. (The chief executive, Lenny Comma, noted in the release that same-store sales were up 2% partially through the third quarter.)

Jack in the Box reported earnings of $25.1 million, or 96 cents per diluted share, on $215.7 million in quarterly revenue, beating consensus estimates of 92 cents a share. The company, as of April 14, had unrated credit facilities including $315 million outstanding on a term loan and $739.4 million outstanding in a $900 million revolving credit facility. The loans carry an interest rate of 2.25% plus Libor. The company extended the maturities through March 2021 in a recent amendment reached with lenders.

Jack in the Box had embarked on the strategic review of the franchise last December, following an uprising among franchisee associations that sued the chain and sought the ouster of Comma and the board of directors.

In the release Thursday, Jack in the Box Inc. directors and management had contacted “potential strategic and financial buyers, both domestic and international,” while also exploring “various financing alternatives, and the board and management team have concluded that implementing a new capital structure in the form of a securitization is the best alternative for driving shareholder value at this time.”

Simultaneously, the company explored various financing alternatives, and the board and management team have concluded that implementing a new capital structure in the form of a securitization is the best alternative for driving shareholder value at this time,” the release continued.

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Whole business securitization
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