Jimmy John’s is somewhat of a misnomer for the national sandwich chain, which no longer belongs to its controversial chairman and founder “Jimmy John” Liautaud.

Liautaud sold a majority stake in the franchise to Roark Capital Group in a 2016 leveraged buyout. The 2,690-store chain will have no claim to its franchise fee and royalty payments, either, after pledging them over in its first-ever, $850 million whole business securitization, according to a presale reports issued by Kroll Bond Rating Agency and S&P Global Ratings.

These kinds of transactions are often used to refinance more expensive unsecured debt issued to Proceeds will be used to pay an existing loan facility.

There have been several this year, including refinancing by Domino’s and Church’s Chicken and debut deals from Five Guys Burgers and Fries and Coinstar.

James J. Liautaud, Jimmy John's Chairman
James J. Liautaud, Jimmy John's Chairman Jimmy John's

The Jimmy John’s Funding transaction consists of three classes of senior bonds, each with varying anticipated repayment dates. The $400 million in Class A 2-I Notes will have a four-year repayment period, while the $400 million Class A 2-II series is to be repaid by July 2027. An additional $100 million may be issued out of the Class A 2-II series. The A-2 series will have a scheduled amortization of 1%.

The pari passu Class A-1 notes totaling $50 million will be undrawn at close, but the outstanding principal balance will be due within five years unless extended on a two-year renewal option.

Each tranche carries a preliminary BBB rating from Kroll and S&P – an important feature for heavily leveraged, junk-rated or unrated companies that can obtain lower-cost capital through an investment-grade vehicle. Kroll estimates Jimmy John’s total ratio of debt to securitized cash flow is 5.5x, similar to that of two other debut whole business securitizations this year: Five Guys Funding LLC Series 2017-1 and FOCUS Brands Funding 2017-1.

S&P says the cash flow provides plenty of backing for the notes: it estimates it would take more than a 52.3% drop in cash flow to impact principal and interest payments. Free cash flow would also be directed toward amoritization in cash trap trippers should the transaction's debt-service coverage ratio dip below 1.5x.

The collateral consists only of royalties and fees from franchised and company-owned Jimmy John's Gourmet Sandwiches stores, which each average over $800,000 in sales a year. Profits from company-owned stores (only 2% of the chain’s locations) and rental income is not included.

Franchised-owned stores, split between 760 franchisee groups, make up 97.7% of the chain’s locations, all within the U.S. They have a relatively short average tenure of 7 years compared to other restaurant franchises that have conducted whole business securitizations, such as Church’s and Arby’s, Kroll noted. The weighted average remaining term on their franchise agreements is 5.7 years.

Jimmy John’s has focused on franchise expansion in the last five years, roughly doubling system-wide sales from $1.2 billion to $2.2 billion for the 12 months prior to March 2017. Over 30% of revenue is derived from delivery services.

The chain, which considered going public in 2015, has experienced negative same-store sales growth since 2016, which Kroll attributes to increased competition from third-party food delivery service in Jimmy John’s expansion areas.

The amount of Roark Capital Group’s majority stake in the firm was undisclosed last fall.

Jimmy John’s was founded in 1983 in Illinois by a 19-year-old Liautaud. He and long-time president and New Zealand native James North built it into the fourth largest fast-casual restaurant and the third largest sandwich chain in the U.S., according to Kroll.

Barclays is the sole structuring adviser and sole bookrunner.

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