The franchise loan sector, which saw no traditional loan pools securitized in 2005, is expected to begin a slow turnaround in 2006, with stabilizing loan pools and improvements in the underlying franchise business operations. But it will be a hard-won recovery, predict analysts from Fitch Ratings. They are maintaining a negative outlook on the sector as they expect more credit downgrades versus upgrades going forward.
In most franchise transactions, said Fitch, the trusts rely heavily on the servicer to resolve defaulted loans in a timely and efficient manner in order to preserve the senior notes' credit quality.
Meanwhile, Moody's Investor's Service said it expects to see several new franchise loan transactions in 2006. These loans will likely have one or more of the following business value components: more creditworthy borrowers; strong servicing and backup servicing arrangements; or a wrap provided by a financial guarantor. Still, securitization pools with large concentrations of business value loans have preformed poorly in the past, and future deals with the same characteristics will need higher credit enhancement at all rating levels, Moody's said.
Market challenges over the last several years have forced some operators to be more efficient and to better position themselves to benefit from an economic recovery and from positive demographic trends.
Among convenience stores and gas stations, Fitch said it remains concerned about how operators will stay profitable in an environment of rising gas prices, increasing competition for gasoline sales from hypermarkets, and tougher competition for convenience stores from drug chains and dollar stores. The Energy Analysts International said that hypermarkets accounted for 7.7% of the U.S. retail gasoline sales, and is expected to capture as much as 15.4% of motor fuel sales by 2008
Among restaurants, Fitch has a generally favorable outlook, owing to increasing disposable income, an aging population and the shrinking size of the average U.S. household. Casual dining and fast casual dining business will outpace quick-service restaurants (QSR), Fitch said. Competition is intensifying and right now the casual dining segment is the strongest among the broader dining chains struggling to distinguish themselves.
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