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SFIG Vegas: Whole business ABS weathers 1st rating downgrades

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Recent rating agency downgrades do not appear to have dented enthusiasm for bonds backed by franchise fees.

This month, S&P Global Ratings issued a one-notch downgrade to two series of notes issued in TGI Friday's 2017 whole-business securitization. The agency cut both the Class A-1 and Class A-2 notes issued by the $425 million transaction by one notch, to BB+ from the original BBB-, citing the chain's declining debt-service coverage ratio as well as same-store sales and average unit volume.

The action came two months after S&P completed a ratings watch review of the $785 million Arby's Funding LLC securitization, although it concluded by affirming the existing ratings.

Participants at the Structured Finance Industry Group's annual conference in Las Vegas seem to view those events as outliers in a sector that continues to gain in popularity with investors. Since early 2017, more than $13 billion in whole-business securitizations have taken place, more than doubling the amount of securities outstanding.

“It’s somewhat unusual for us to have credit watches in this asset class," Kate Scanlin, an analyst and senior director at S&P, said at a panel on Sunday. S&P currently rates 29 series of notes from 16 corporate securitizations of franchise- and royalty-fee payments.

Fueling new issuance is the expansion of this type of transaction outside of the traditional quick-service restaurant industry. Deals now include automotive service centers, kiosk operators (Coinstar Inc.) and fitness centers, following last year's first-time, $1.2 billion ABS by Planet Fitness, through Guggenheim.

The investor base is also growing.

“It’s probably double or triple the size of people” who were looking into investing in whole-business deals before 2015, said Leo Efstathiou, chief executive of Finsight, an electronic platform hosting whole-business-deal roadshows to investors. "We’re seeing deviation away from huge asset managers and insurance companies."

While they lack the triple-A ratings of those more established asset classes, whole-business ABS offers yields on par with the triple-B/double-B rated notes backed by corporate loans and bonds, and are gaining appeal with asset managers as well as the traditional esoteric buyers.

Last year, $6.01 billion in new whole-business deals hit the market, following a $7.6 billion issuance volume in 2017, constituting more than half of the $24 billion in outstandings, said Cory Wishengrad, senior managing director and head of structured product originations for Guggenheim and another panelist.

One of the draws for the wider investor base is the secondary-market liquidity, which saw over 20% (or $5.4 billion) change hands in 2018, said Wishengrad, citing TRACE data from the Financial Industry Regulatory Authority (FINRA). Two of the brands with the most sought-after secondary market paper were Dunkin’ and Domino’s, he said, each trading above par in both short- and long-tenor notes that offer a combined high 3%-low 4% annual yield, he said.

Wishengrad said more than 70% of whole-biz ABS bonds placed by Guggenheim were through money managers who normally play in the corporate-loan and bond space.

Evan Shay, a whole-biz investor and vice president of T. Rowe Price Group, said the introduction of four- to five-year tranches has opened up the space for the “traditional ABS investor who is looking for two- to four-year paper.”

Investors apparently have not been discouraged by the red flags from the negative credit watches that began with Arby's Funding LLC. The two reviews for Arby's last year were related to the impact on acquisitions to Arby's existing deal, rather than performance.

In February 2018, Arby's $785 million in outstanding whole-biz ABS notes were placed under review after parent Inspire Brands completed a $2.9 billion buyout of Buffalo Wild Wings. The review was based on the additional $2 billion in external debt Inspire Brands had taken on, but S&P ultimately was satisfied cash flow would remain adequate for whole-biz investors.

In September, Arby's whole-biz notes again went under review when Inspire Brands announced another megadeal: the $2.3 billion buyout of Sonic Corp., as S&P analyzed whether the combined operations were affect fee payments to either Arby's Funding LLC or Sonic's own whole-business master trust.

Ratings for both deals were affirmed in December.

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Whole business securitization
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