While only one conventional franchise securitization has closed this year, as many as two car-dealership finance securitizations are expected to come to market before yearend, bringing the total to three dealership deals in 2002, up from one annually since Falcon Financial's first term deal in 1999.

Falcon, the sector's pioneer, is expected to hit the market as early as this month with a $150 million-range deal, sources said. Falcon was established in 1997 and is partially owned by an affiliate of Goldman Sachs. Goldman will underwrite the upcoming deal.

Falcon last securitized in November 2001, with a $150 million sen/sub deal via Goldman. On the pending transaction, the company is considering a surety wrap, which would be a first for the issuer, a source said.

Further down the line, it's rumored that Capital Automotive REIT is prepping its second securitization of the year. In June, the company brought its first deal since 1999, issuing about $152 million of a $325 million transaction to investors via Credit Suisse First Boston and retaining the remaining balance. MBIA wrapped three of the four triple-A rated classes.

CARS is said to be considering a deal as large as $230 million, although that deal is said to be in the preliminary stages. As of press time, officials at the REIT did not return phone calls seeking comment (nor did contacts at Falcon).

Like CARS, and contrary to the business value model sometimes associated with problematic franchise securitizations in the past, the few deals braving the market in the last two years have been real-estate intensive.

For example, several of the 2001 deals - including restaurant-backed deals from CNL Franchise Networks and US Restaurant Properties - were structured as triple-net lease transactions and marketed as CMBS.

According to rating agency analysts, dealerships have benefited from the ebb and flow of manufacturer pricing incentives that began last fall. Further, some manufacturers are subsidizing scheduled maintenance of new cars as part of the incentive packages, which also benefits the dealerships.

Because the parts-and-services function of a dealership is typically its highest margin business, 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.

Falcon's securitizations typically benefit from loan level enhancements such as "springing recourse," which means that, under certain "trigger" conditions (such as fraud or voluntary bankruptcy), the loans can have recourse to principals at the dealership.

Falcon's deals have performed well. Of its three outstanding securitizations, there has been only one default, which occurred fairly early on in the 2001 deal, causing just over 2% of that pool to be defaulted, according to surveillance from Fitch Ratings. Delinquencies are 0.0% in all three deals.

As the term market has not been favorable to the franchise sector, the conduit market has been a source of financing for certain lenders, including CNL. Additionally, certain quasi "captive" financers, such as Golden Managers Acceptance Corp. (Golden MAC), fund loans in ABCP conduits. Golden MAC, a lending subsidiary of McDonald's, makes loans to its franchisees and funds them in McDonald's Golden Funding Corp. ABCP conduit.

With accounting changes threatening to take some of the economic benefits out of conduit financing and the threat of higher costs being be passed on to sellers, there may be a resurgence of the more conventional franchise term deals down the line, one franchise analyst speculated.

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