Jimmy John’s Funding is preparing an $825 million securitization of Jimmy John’s Franchise business and related assets, using part of the proceeds to make debt service payments on senior unsecured notes and for general corporate purposes.
The restaurant company’s assets will back the collateral pool, which includes existing and future U.S. franchise agreements, development agreements, and related franchisee royalties and fees, synthetic royalties on existing and future company-owned restaurants according to a pre-sale report from S&P Global Ratings.
Jimmy John’s is based in Champaign, Ill., and has over 2,650 restaurants in 43 states and the District of Columbia. Over the last 12 months, the company saw $2.3 billion in system wide sales.
After repaying the senior unsecured notes, Jimmy John’s will have $1 billion in securitized debt outstanding, including $308 million outstanding from the 2017-1, A-2-II notes, according to S&P.
Further, S&P noted that ratings on outstanding tranches of Jimmy John’s Funding LLC, 2017-1, were placed on CreditWatch, with negative implications. The rating agency noted that pro forma for the 2022-1 issuance, the debt service coverage levels are no longer expected to be in line with the current ‘BBB+’ rating on the notes. The rating agency expects the debt service coverage ratio to correspond with 2017-1’s initial rating level of ‘BBB’.
Barclays Capital will be the transaction’s sole structuring advisor. The trust will issue the notes through four classes–A-1, A-2-I, A-2-II, and A-2-III–all rated ‘BBB’. Midland Loan Services will service the notes.
Almost all of Jimmy John’s restaurants, 98%, are franchised, with the single largest franchisee representing only 4% of system wide sales as of October 2021, S&P said. That confers a more stable cash flow stream to the business, compared with other businesses that have a lower portion of franchised restaurant locations, the rating agency said.
In terms of cash flows by state, the transaction is highly diversified. Illinois accounts for 10.7% of the portfolio. Michigan and Texas follow, with 8.5% and 6.0%, respectively.
Among the deal’s other strengths are performance tests, which include rapid-amortization and cash trapping.
Not all was positive with the transaction, however. S&P noted that Jimmy John’s had experienced negative same-store sales from 2016 to 2020. One mitigating factor is that on a year-to-date basis, same-store sales have held up at a cumulative annual growth rate of 17%. Increased digital exposure, limited time offers and the company’s loyalty program have helped, S&P noted.
