In what some are calling a pinnacle deal for the franchise sector, Falcon Financial is readying a $140 million transaction backed by car dealership loans via Goldman Sachs, the first unwrapped franchise deal this year.

Though Falcon's dealership collateral is arguably a different asset type than the restaurant or convenience store/gas station loans backing typical franchise ABS, the transaction is being viewed by some as an "imperfect gauge" of investor reception to uninsured franchise paper from an untarnished issuer.

"The issue is, Can you sell triple-B paper to investors?'" stated one analyst. "Will they even consider it?"

An investor who has seen the deal noted that "Perhaps it's a gauge but then I don't think their investor base is more than five or ten people. It's a fairly small universe of franchise investors."

He added that ABS CBOs will probably be looking at the sub bonds as well.

Though the franchise sector has been under serious stress this past year, Falcon's two prior deals have yet to experience any credit problems. In fact, there have been no defaults or delinquencies in either of the deals, an industry source said.

The company first issued during the fourth quarter of 1999, and came to market again in October 2000. Goldman, which through an affiliate is a majority owner of Falcon, placed both deals.

At press time, premarketing levels were unavailable. The deal is being placed as a Rule 144A private placement.

Dealership loans

According to rating agency analysts, dealerships have benefited from the manufacturer pricing incentives that boosted auto sales in October. Further, manufacturers offer subsidized scheduled maintenance for new cars, as part of incentive packages, which also serves the dealerships well.

"The parts and services department of the dealership is the greatest source of profitability, in terms of the overall profit margins," said Warren Wells, franchise analyst at Fitch.

Because dealerships rely on their parts and services departments, if new car sales were to slow down dramatically going forward, there might be a lag effect, as the volume of recently purchased cars coming in for service would slow down.

Just three deals

Other than Falcon, there have been two franchise deals this year, one from CNL Financial Services and one from U.S. Restaurant Properties. Both were structured as triple-net-lease deals and marketed to CMBS investors as well as ABS.

As for the Falcon deal, the loans in the pool are generally secured by fee simple mortgages.

Elsewhere in franchise, it's said that Textron will move ahead with the franchise deal it had planned for the Sept./Oct. time period prior to the terrorist attacks. It is now loosely set for first quarter 2002, said market sources.

Also, The CIT Group, which officially changed its name to Tyco Capital in October, is rumored to be mulling a franchise deal. According to one source, the company has done equipment financing in the franchise sector.

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