A new issuer in the franchise sector is expected to enter the term ABS market possibly before year end, market sources said.

The distressed sector has been rife with speculation over increased activity, but the talk has yielded little more that idle hearsay to date. However, those familiar with the situation believe the as yet unnamed issuer to be a solid candidate, given its origination history. "This is not a newly established entity," a source said, adding that rating agencies might see as many as 10 franchise prospects in a given year, a majority of which are small start-ups with a scant origination history that never make it to the term market.

The company in question originates loans for franchise operations across the country, sources said, and the pool most likely to be securitized in this instance would be comprised of restaurant collateral.

Whether or not the deal gets done largely depends on the necessary credit enhancement levels. "A lot of times, originators see the enhancement levels and walk away because it is not economical for them, so they may put it in a conduit rather than close a term deal," a ratings analyst said.

Enhancement levels on franchise deals can vary widely as it is not a homogeneous asset class.

Meanwhile, there has been talk surrounding a new term transaction from GE Franchise Finance, formerly Franchise Finance Corp. of America (FFCA), for some time. However, a deal has yet to materialize. The last time FFCA came to market in its former incarnation was in 2000. The two issuers that tap the market regularly are Falcon Financial and Golden Funding, neither of which has securitized this year.

Nonetheless, sources maintain that there is an increased amount of activity in the franchise sector overall, with more originators opening up warehouse lines. It is likely that an issuer will come to the term market soon to test the waters, sources said, but some are skeptical about how new franchise paper would be received by investors. Despite a downward trend in defaults, reported earlier this year by Fitch Ratings, recovery rates remain extremely low.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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