The advent of operating-company securitizations has created new opportunities for the risk transfer players.

In the landmark Arby's franchise securitization, where the company borrowed against the revenue stream associated with its logo, both Ambac Assurance Corp. and Swiss Re New Markets partook in the transaction, which in itself is a rarity, sources said. The $290 million deal closed last week.

"Swiss Re's risk appetite and Ambac's risk appetite are very different," said Jennifer W. Costain, a vice president at Ambac who worked on the deal. "But together, we were able to combine our risk profiles to take on an entire transaction."

In the Arby's securitization, Swiss Re took the first-loss position while Ambac wrapped the deal for a triple-A rating. Though the transaction was structured as one tranche, Swiss Re's first-loss position effectively gives synthetic subordination to create a risk level that Ambac was comfortable wrapping.

Similarly, it provides Swiss Re with a risk level it is comfortable wrapping.

"Traditionally, a reinsurance company would take an excess role on a primary insurance company," said David Moran, an associate director at Swiss Re. "In this scenario, we took the risk and allowed Ambac to do what they do best, and that was to put a financial guaranty on the table, as well as take the excess risk transfer piece. It varied the expertise of two companies."

Reinsurance companies generally take on less volume at more risk, while primary insurance companies take on more volume at less risk.

Operating Companies

The Arby's securitization was unique in other ways. For one, the deal was shopped in the Rule 144A market, very unusual for a new asset type, no less a rarity for intellectual property securitizations.

Because of the reinsurance component to the deal, Swiss Re, which will typically bring catastrophe insurance risk into the capital markets, is bringing capital markets risk into the insurance market, the company said.

Arby's securitization resembles the Punch Tavern's deal out of the U.K. earlier this year. Ambac also played a part in that transaction.

"I think that securitization technology, with respect to intellectual property, will be an efficient and clever financing tool for companies whose operations and cashflow are generated by patents, usage, and licensing rights," Ambac's Costain said. "Franchises are obviously excellent candidates for that category, but more and more companies have valuations driven by these concepts."

Because of the difficulties in today's corporate and high-yield markets, issuers are continually looking for alternatives to issuing straight debt, which is one of the reasons a deal like this was able to get done. This type of technology is being looked at more and more as a vehicle for financing (see ASR 11/27/00, p. 1).

"It's often the case that the structured finance markets are more attractive to issuers when the traditional debt market environments get tough," said Tom Currie, a director in the new assets group at Standard & Poor's Ratings Services. "And operating asset securitization is no exception."

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