The year 2000 was a turbulent one for the franchise loan industry. Difficult market conditions for the sector were a result of substantial credit problems in some franchise loan pools. The credit deterioration and ratings volatility in franchise deals in 2000 were not broad-based, but were generally concentrated in pools sponsored by Bay View Franchise Mortgage Acceptance Corporation (FMAC) and Global Franchise Trust. Problems for large borrowers and resulting losses created significant ratings volatility for some transactions for those issuers.
The primary culprit in the credit deterioration was large acquisition "business value" or "enterprise" loans.1 Competitive pressures in the franchise lending market in the late-1990s led some lenders to advance substantial amounts of cash to borrowers with little or no equity. Ample availability of cash gave an incentive for some operators to expand beyond their means and managerial capabilities. With this substantial leverage, sales declines due to systemwide franchisor troubles, or problems resulting from managing additional units, made some borrowers vulnerable and led to loan defaults. With no hard collateral, recoveries on some business value loans were low, leading to large losses.