Last week Credit Suisse First Boston shed some positive light on the troubled franchise loan sector, pointing out that there are still issuers out there with good track records, backed by well-performing deals.

Standouts include Franchise Finance Corp. of America and CNL American Properties, about which the firm says, "[Both] have proven that a diversified mix of product offerings as well as diversified funding sources are important pillars in the business model of franchise lending."

While highlighting those two issuers, CSFB also discusses the significant downgrades in the sector, as well as the delinquencies and defaults still in pipeline.

In the study, CSFB profiles and displays a deal list, broken down by current balance, defaults, and cumulative loss, for the following issuers: FFCA, CNL, Amresco, Enterprise Mortgage Acceptance Corp. (EMAC), and Franchise Mortgage Acceptance Corp. (FMAC).

Notably, CSFB has compiled a chart on liquidated loans and recovery in the FMAC securitizations. The chart includes deal number, borrower, recovery rate, original balance and collateral type (fee simple, ground lease, equipment loans, space lease loans, enterprise loans... etc.).

According to this chart, the average recovery rate from the $151 million sample of liquidated loans is approximately 43.2%. CSFB notes that the average recoveries were probably not as severe as most would have expected, given the collateral was about 50% fee simple real estate.

Meanwhile, CSFB is lead manager on Textron Financial's pending franchise securitization. As Textron will be new to the sector, the company was not mentioned in CSFB's research.

Private label a good buy?

So far this year, issuance in private label credit cards has totaled $4.8 billion, more than the volume levels for all of 2000, according to a research report by Banc One Capital Markets.

Additionally, with the increasing amount of supply of private label credit card expected over the next three years, liquidity should improve.

Private label cards trade at a discount to top-tier general purpose and offer "investors a good opportunity to pick up incremental spread while remaining in a popular asset class with a well known structure," BOCM notes. Sears, Roebuck, & Co., which is the benchmark name of the sector, prices an average of five basis points behind general purpose cards, while other issuers price at an average of 14 basis points behind.

Currently, the fixed-rate product offers an attractive opportunity. According to BOCM, the few fixed-rate deals that have come to market have priced further outside the general purpose cards than the equivalent floating rate transaction. For example, fixed-rate deals by Sears were on average 10 basis points behind general purpose cards (compared to five on the floating-rate deals).

Similarly, the recent Household International deal saw its floating-rate A-class come at six basis points behind general purpose cards, while its fixed rate A-class came at 10 basis points behind. This is surprising, according to BOCM, given the strong bid for three-year fixed-rate paper, and the better credit quality associated with fixed-rate versus floating-rate collateral.

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