TOP 10 of 2017: Whole Biz ABS moves beyond restaurant chains
Editor's note: This is the sixth in a series of 10 articles revisiting some of our most-read stories of the past year.
Whole business securitization was back on the menu with investors in 2017 after taking a hiatus through most of 2016.
Much of the 171% increase in issuance to $7.6 billion from $2.8 was cyclical, as big players like Wendy’s, Domino’s and Dunkin’ Donuts refinanced 15 earlier transactions; yet there were also a number of first-time issuers such as Jimmy John’s, Five Guys Hamburgers and Coinstar, the vending kiosk operator.
Indeed, Coinstar’s first-ever offering was also sign that whole business securitization was expanding to franchise companies outside the quick-service dining sector.
Whole-business securitizations involve franchise operators turning over the operational income - including franchise fees, royalties and other revenue streams - into a securitization trust to back debt issuance. This became a common tactic for firms that were taken private in leveraged buyouts before the financial crisis, but has regained favored status since 2011 for highly leveraged operators like Arby's, Church's Chicken and TGIFriday's (the latter with an estimated debt-to-EBITDA level of 5.4x in 2016, according to Moody's).
The primary benefit for many of these speculative-grade firms is having access to investment-grade financing, with most deals obtaining triple-B ratings.
What helped to grow the market in 2017, even as foot traffic declined and same-store sales growth slowed across the quick serve dining industry, were structural innovations that widened the investor base. TGI Friday’s pledged to repay 2% of note principal annually; Dunkin’ Brands added a longer four-year tranche to its offering which brought in money managers. Domino’s deal included the first floating-rate tranche associated with a whole biz securitization; the $2.075 billion transaction was oversubscribed by four times.
“By any measure, the size of investor participation in the market has grown significantly,” Cory Wishengrad, head of structured products origination at Guggenheim Securities, told a panel audience at the ABS East conference in September. That participation included secondary market activity, with Domino’s and Dunkin’ Brands seeing over $100 million in trades last August – the equivalent to 3% of bonds outstanding changing hands in a one-month period, he said.
Investors were also comfortable with big names like Wendy’s and Domino’s whose syndicated loan and high-yield bond offerings they tend to favor. “These are credits that have long been traded in the [corporate loan] and [unsecured] bond markets,” said Benhamin Fernandez, a managing director at Barclays also speaking on the ABS East panel. “[Investors] are familiar with them, and they like them.”
The whole-business securitization market is just a fraction of the entire nontraditional asset-backed securities market, but helped contribute to a 28.5% surge in esoteric ABS issuance last year to $478 billion as of Nov. 30, according to S&P Global Ratings.