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Pet Supplies Plus adds $355M deal to whole-biz ABS dogpile

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Another debut issuer in whole business securitization launched a deal this week, with Pet Supplies Plus marketing a $355 million bond offering backed by the revenue-generating assets of the 460-store retail chain.

The notes issued by PSP Funding LLC 2019-1 will be backed by revenues and fees generated from royalties, profits, distribution agreements and intellectual property licensing.

The notes include a $25 million variable-funding Class A-1 series and a pari passu $330 million A-2 Series, both with preliminary triple-B ratings from Kroll Bond Rating Agency and Morningstar Credit Ratings.

The funds raised by the note sales will refinance existing debt and provide a potential distribution to the company, which is controlled by Sentinel Capital Partners.

The deal coincides this week with that of another first-time whole-biz issuer, Primrose School Franchising Co., which is marketing the franchise fees and revenues of its chain of early childhood education and day care centers.

Whole-business securitization has trended up in 2019, while seven transactions totaling $6.3 billion already priced year-to-date – already topping the $6.1 billion in record issuance for the esoteric sector in 2018, according to Finsight.

Barclays is the sole structuring agent for the PSP offering.

Unlike Primrose, which is 100% franchised, PSP has a mix of 241 domestic franchised locations and 219 company-owned store – a lower franchised ratio than most rated whole-business transactions. The revenues and royalty payments from both types will be included as collateral for the PSP Funding bonds.

Bundling revenue from company owned stores may invite some volatility into the deal, “given variability in operating expenses,” noted Kroll. But the company-owned store revenues will be complemented with 34% of the revenues generated from Pet Supplies Plus’ distribution center revenue contributed to the securitization trust – an unusual arrangement for a whole-business transaction.

Pet Supplies Plus, based in Redford, Mich., had approximately $1 billion in annualized sales, as of May 2019. It is a part of an estimated $62 billion pet-food and supply, non-veterinary industry in the U.S.

The chain sells higher-priced pet supplies, benefiting from the boom in “sustained social trends, specifically the ‘humanization’ of pets and ‘premiumization’ of pet products,” according to a Kroll presale report.

Pet Supplies Plus also gains from the “limited seasonality” of their business, since dog and cat owners will spend on their animals regardless of personal financial constraints: Kroll noted an industry survey showing consumers increased their pet needs spending by 12% during the 2008-2010 financial crisis.

Pet Supplies Plus has experienced positive same-store sales for eight of the past nine years.

“Although the pet industry is strong, the retail environment is competitive with multiple concepts vying for a similar customer base,” Kroll’s report added. “Grocery stores, independent chains and specialty stores as well as eCommerce companies like Chewy.com and Amazon’s wag.com pose a major competitive challenge. The pet retail industry is also dominated by big box retailers such as Petco and PetSmart which have a larger scale and a larger product offering.”

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Whole business securitization