As of mid year 2000, volume in the franchise sector of the asset backed market has fallen relative to 1998 and 1999 with issuance topping the one billion mark. The lack of issuance has been partially driven by ratings' action on four of the 50+ franchise securitizations along with choppy capital markets within the private placement sector. The franchise sector was highly competitive through 1997 and 1998 causing some lenders to compromise their credit standards through concessions on interest rate, security (collateral) and covenants. Ultimately, this will lead to a tiering among franchise originators. Lenders that maintained their underwriting discipline will rise to the top of the tiering scale and continue to provide good underwriting for loans supporting future securitizations. In fact, some issuers such as Franchise Finance Corp. of America and American Commercial Capital have announced strategic alliances with large commercial banks to increase the liquidity of their originations. Fitch anticipates that more franchise lenders will follow a similar path as interest rates rise and the securitization market becomes more selective.
Recent rating actions by Fitch, within the franchise sector on FMAC 1997-C, FMAC 1998-A, FMAC 1998-B and Global Franchise Trust (GAFCo) 1998-1, were taken due to realized losses or the potential for large borrower concentration losses within each of the pools. These actions are not necessarily an indication that franchise paper is following the deteriorating performance witnessed in the home equity and sub prime auto sectors.