A franchisor of two dozen various "do-it-for-me" (DIFM) homes-services businesses, including the widely known
Neighborly Co., a long-time franchisor that has accumulated 24 maintenance and repair brands for both home maintenance and repair, is pledging all of its forthcoming franchise-fee, royalty and other revenues to a new master trust. The Neighborly Issue LLC Trust will issue three tranches of notes for the inaugural Series 2021-1 issuance with preliminary BBB- ratings from Kroll Bond Rating Agency.
The note proceeds will be used to pay off Neighborly's existing debt and repay a portion of outstanding preferred equity to its private-equity sponsor, New York-based Harvest Partners, according to a report from Kroll. Barclays is the sole structuring agent and lead arranger.
Kroll considers Neighborly's brand lineup the most diverse of any WBS transaction it has rated to date, with 17 of the 24 Neighborly brands initially expected to directly contribute franchisee revenue into collateralization pool. (The remainder will fund through licensing arrangements, according to Kroll's report).
The largest segment of notes is through the Class A-2 tranche totaling $800 million. Neighborly also is issuing a $30 million variable funding note and a $10 million tranche that will be used toward funding a liquidity-reserve account that the company is establishing in lieu of a third-party servicer-advance arrangement to cover any shortfalls in contractual cash flow.
The revenues will be drawn from fees and royalties paid by 3,374 franchise locations in all 50 states, plus Europe and Canada where operators make up 11.8% of the market territory. Neighborly had $2.2 billion in systemwide sales for the 12 months preceding October 2020, with a 14% compounded annual net revenue growth from 2019.
The note issuance will drive Neighborly's leverage ratio to 6.1x, in line with other franchise sponsors of WBS deals.
Neighborly's deal also expands the sector types within whole-biz securitization. Originally a format nearly exclusive to fast-food and quick-serve dining operators, the field of issuers in the last couple of years include franchisors in the automotive-retail service centers, childhood learning centers and fitness gyms.
In recent years firms have increasingly turned to whole-biz deal-making to fund day-to-day operations or refinance debt, allowing these higher-risk and deeply leveraged businesses to borrow with investment-grade ratings. A record 13 whole-biz deals
But issuance fell back to $4.23 billion in 2020 as the COVID-19 pandemic brought pressure on many WBS issuers in the quick-serve dining segment. Many of those businesses were primarily dine-in operations that suffered from government-enforced closures meant to curb the spread of the coronavirus.
But according to Kroll, Neighborly's service brands benefited from a "recession-resistant" operational model that includes emergency and episodic home repair services that accounted for 45% (or $982 million) of total sales last year. In addition, demand for home cleaning, repair and maintenance services coincided with a key COVID-19 pandemic-related trend: expanding suburban housing stock and rising occupancy rates as work-from-home professionals left urban centers in droves.
Although Neighborly is the largest franchisor and provider in the DIFM market, it holds less than a 1% market share of an estimated $300 billion market served by about 300,000 mostly independent, "mom-and-pop" providers, according to Kroll. The company not only has available headroom to scale up its market presence, Kroll's report stated, but "the home services industry is expected to grow at an annual rate of 4% to 6% in the near-term due to a number of positive trends."
Neighborly's deal is the first whole-business securitization launched this year. The most recent transaction involved ServiceMaster Global Holdings
