Not surprisingly, this year is shaping up to be another slow run for the franchise sector, which has seen just two deals, both backed by nontraditional franchise loans to car dealerships, a collateral type unscathed by the headline deterioration associated with convenience store and gas station (C&G) loans. Including dealership franchise ABS, the sector could see about $700 million in deals before yearend (currently halfway there), according to an industry banker. Last year, there was just under $600 million in franchise ABS, by Thomson Financial's tally.

Below the headlines, however, Wells Fargo, which has been a rumored term candidate over the past two years, privately placed a $250 million, unrated securitization primarily with an ABCP conduit. That transaction was structured as a term deal with a portion placed with a non-conduit third party, sources said. Wells, which originates about $300 million in franchise loans each year, structured this deal on its own, another reason it went unseen by the primary ABS market.

The ability of originators to finance collateral is a positive development, a ratings official commented, as it implies an investor base and perhaps a resurgence of the market down the line.

"If people are getting their financing in the whole loan market, or doing private unrated deals, that means there's a level of understanding of the collateral," said the ratings source. "The investors are theoretically there."

Currently, the potential names for future term ABS deals this year are the financially stronger companies with the proven track records, as opposed to the smaller, specialty finance shops that were active in the late 1990s.

"The entities that were solely in business for securitization are all gone," said a banker. "Securitization is not a business but a way of funding. The guys that know this are still around."

GE Franchise Finance, formerly Franchise Finance Corp. of America (FFCA), may bring a more traditional franchise securitization this year, according to market sources. Calls to officials at GEFF went unreturned. GE Capital Corp., however, has indicated that it will rely less on its Edison Asset Securitization conduit to warehouse originations. Sources believe the term market will see more asset types from the various financing arms of GECC.

Though FFCA was essentially the sector benchmark, it has also suffered from exposure to the C&G sector. As one banker pointed out, however, the FFCA non-C&G deals - as well as the non-C&G portions of its blended deals - have performed in line with expectations.

The other sector potentials include the franchise subsidiaries of CNL American Properties Fund and U.S. Restaurant Properties, both of which are REITs and, accordingly, underwrite real estate intensive financings, typically net lease deals. According to sources, CNL is actually finding a profit-play in the "10-31" market, originating leases and selling the properties outright, typically to individual investors. The 10-31 market is generally comprised of high net-worth individuals that take the 10-31 tax election, which allows them to sell a property and defer the capital gains tax by reinvesting, in this case purchasing revenue generating properties.

These properties tend to sell in the $15 to $20 million range, and are already populated by national franchise concepts paying leases to the property owners, yielding in the area of 8%. This market has improved as high net-worth individuals are shying away from other investment areas, such as the equity markets.

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