Whole business securitizations (WBS) backed by restaurant franchise payments have shown stable performance despite recent difficulties in the industry, according to Moody’s Investors Services in a recent report.
Debt service coverage ratios (DSCR) have been either stable or improving, with the DSCR of senior tranches ranging from 3.15x to 3.98x.
The rating agency expects ratings on these ABS to remain unaffected by the economic downturn, as the underlying assets benefit from both specific positive aspects of the business brands and the structural features of the securitizations themselves, the agency reported.
Although the weak economic conditions and high unemployment characteristic of the downturn have shown a decrease in discretionary consumer spending, the cheap meals offered by “quick service restaurants,” which account for three of the five securitized brands, have experienced minimal declines in customer traffic. These restaurants are better suited to satisfy customers’ demand for less expensive meals away from home.
Additionally, Moody’s cited the strong international presence of certain brands, namely Dominos, as a benefit to the pool. These franchises have minimal branded competition abroad.
In terms of structural issues, the credit rating agency explained that company-owned restaurants must execute franchise agreements with the WBS issuers and remit to the securitizations’ royalty payments rather than EBITDA. This structural feature protects from the risk of lost revenue in the event that refranchise some or all of their owned restaurants, Moody’s said.
A strictly defined servicing fee, sized to cover the essential costs and expenses of the servicers, limits the discretion of servicers to engage in risky projects and enhances margins on transactions and cash flows, the agency added.