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Massage Envy turns to whole-biz ABS for debt refinancing

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Massage Envy, a nationwide franchise of nearly 1,200 spa and massage therapy service locations, is turning to whole business securitization to refinance debt and fund a distribution to its private equity sponsors.

The Scottsdale, Ariz.-based franchise is sponsoring a $425 million bond transaction collateralized by fees, royalties and other revenues from the operations of the stores owned by 512 franchisees.

The company is 100% franchised, with each operator owning on average 2.3 stores apiece as of December 2018, according to a presale report from Kroll Bond Rating Agency. Operators on average are signed to 10-year franchise agreements with a 10-year renewal option.

The ME Funding LLC Series 2019-1 transaction consists of $50 million in Class A-1 variable funding notes that will be undrawn at closing, and a $375 million Class A-2 notes offering. The Class A-2 notes are expected to be paid down (or refinanced) by July 2024, with a scheduled amortization of 1% a year.

Barclays Capital is the sole structuring adviser and bookrunner.

Massage Envy, founded in 2002, was acquired by affiliates of Roark Capital in 2012. Roark has previously securitized operations for other retail franchise companies it sponsors, mostly in the quick-serve dining category: Jimmy John’s, Arby’s, Driven Brands, CKE Restaurants, Sonic and FOCUS Brands.

Massage Envy does bring risks in terms of litigation, Kroll’s report cautioned. The firm has been sued multiple times in state courts over alleged sexual assault incidents by employees, which led the company to establish a systemwide Safe Advisory Council in 2017 to review safety policies and procedures such as background checks, training, and a comprehensive incident tracking and reporting system.

Massage Envy has also partnered with RAINN (the Rape, Abuse & Incest National Network), the nation's largest anti-sexual violence organization to perform a comprehensive safety procedures and policies assessment that the company expects to complete by the first half of the year, according to Kroll.

The company has also been the subject of consumer-class action lawsuits surrounding membership agreements and fees, and it’s also been sued by a franchisee association over operations, such as the introduction of a systemwide enterprise software system they alleged was disruptive. Kroll’s presale report says Massage Envy expects to win the case involving franchisees, but nonetheless “such claims would not be material and would not disrupt ongoing royalty collections from the franchise system taken as a whole.”

Massage Envy has averaged $1.3 billion in annual sales the last two years, through services that include massage therapy, skincare and stretch services. Massages make up 90% of the 19 million treatments on average per year.

The deal will bring Massage Envy’s leveraged level to 5.8x (debt to securitized net cash flow), which Kroll says is slightly lower than the debt levels of other whole-biz transactions it rates.

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Whole business securitization