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TGI Friday's ongoing struggles result in whole-biz ABS downgrade

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Last March, Kroll Bond Rating Agency staved off a potential downgrade of TGI Friday’s outstanding whole business securitization notes, noting the “stabilized” leverage and debt service levels of the struggling diner chain.

The reprieve ended Thursday. Kroll announced in a release that the agency was downgrading two series of notes issued in 2017 from the master trust of TGIF Funding LLC because of ongoing declines in revenues and its debt-service coverage ratio.

The chain also experienced a 20% decline in system-wide sales since 2017 as TGI Friday’s has closed underperforming locations and bought out lackluster franchise-owned operations that has increased the share of company-owned restaurants whose revenues and fees are assigned to the trust, the agency reported.

Kroll downgraded the notes one notch to BBB- from BBB, and will keep the two classes of A-1 and A-2 notes under watch for further downgrades as the agency monitors “several management-led initiatives and whether the Company is able to reverse recent trends.”

The notes have a remaining balance of $408.13 million from the original issuance size of $450 million. The Class A-2 notes (with a coupon of 6.02%) have $358.13 million outstanding; the Class A-2 variable and renewable funding notes have $15 million drawn out of a $50 million capacity.

Kroll stated management initiatives, including repurchasing stores and adding promotions to boost foot traffic, have failed to stem the decline in DSCR to 1.9x from 2.2x or the rise in the chain’s senior debt ratio to 6.8x from 6.1x.

Neither of those figures has yet to reach “trigger-event” levels that warrant cash trapping or rapid amortization requirements which would reduce excess cash flow for the company.

TGI Friday’s has suffered nine consecutive quarters of declining same-store sales, as well. It’s most recent four quarterly periods had $2 billion in systemwide sales, compared to $2.5 billion when the original whole-business ABS transaction closed in early 2017.

“The system is approximately 84% franchised as of July 2019 compared to approximately 94% at transaction close,” according to Kroll.

Kroll’s decision follows a similar action last February by S&P Global Ratings. S&P downgraded the deal to BB+ from BBB-, after the chain reported declining store sales and store counts, as well as a DSCR “among the lowest in its peer group” of other triple-B rated corporate securitizations.

S&P earlier this month affirmed the BB+ rating on the notes, prompted by a review after the company’s overall business risk profile had been lowered by S&P.

The notes have an outstanding balance of $408.13 million, according to Kroll.

TGIF Funding is the only whole-biz securitization issuer to undergo a downgrade since the market for franchise-fee ABS was resurrected in recent years. Arby’s Funding LLC had downgrade reviews for two issues of notes totaling $785 million from 2017 and 2018, but both were affirmed in December 2018.

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Whole business securitization
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