Fast-food fanatics take note: The Wendy’s Company is serving up a rare whole business securitization.
The single-B rated company plans a $2.275 billion securitization of its franchise fees; proceeds will be l used to pay off its existing, $1.3 billion senior credit facility and return a nice helping of cash to shareholders.
WEN Series 2015-1 is expected to close by June 1st. Guggenheim Securities is the lead manager;Wells Fargo and Rabo Securities are the co-managers.
Whole business securitization allow weaker borrowers access to cheaper funding than they could get from secured debt. While both types of debt are secured by the same assets — franchise revenue a securitization is more secure. The notes are issued by a special purpose vehicle that uses proceeds to acquire the assets. The franchise fees are collected by the trust, which pays them directly to bondholders. This type of structure typically earns a much higher credit rating than bonds issued by the company itself, bringing down funding costs.
In fact, Standard & Poor’s has assigned ratings of BBB’ to the bond offering, which will include three tranhes of class A notes with a 4.4-year weighted average life, 6.8-year WAL and 9.6 WAL. At least $500 million will be offered of the shorter dated class A notes, $750 million of the medium term class A notes and up to $500 million of the longer dated notes.
The Wendy's system includes approximately 6,500 franchise and company-operated restaurants in the United States and 28 countries and U.S. territories worldwide. In an earnings release today the company stated that it plans to reduce its company-operated restaurant ownership to approximately 5% of the total system by the middle of 2016.
Wendy’s will sell a total of approximately 380 restaurants in 2015 (including the previously announced sale of 100 Canadian restaurants) and approximately 260 restaurants in 2016, for a total of approximately 640 restaurants. The issuer expects to sell a total of 100 Canadian restaurants before the end of June 2015. To assist with the sale of its 540 domestic restaurants, the issuer hired The Cypress Group, which managed the first phase of its system optimization initiative.
"We believe the sale of our domestic restaurants will result in pretax cash proceeds of approximately $400 to $475 million and significantly reduce future capital expenditure requirements, as reflected in our long-term free cash flow outlook,” president and chief executive officer Emil Brolick said in the earnings release.
Moody’s Investors Service affirmed the company’s corporate family ratings and is senior secured credit facility ratings at B1’, in February.
Dunkin' Brands, the parent company of Dunkin' Donuts and Baskin-Robbins, completed a similar franchise securitization used to refinance its senior secured credit facility. The trust issued $2.4 billion of senior fixed-rate term notes and $100 million of variable funding notes. Standard & Poor’s assigned BBB’ ratings to the notes, which is five notches above Dunkin's bank facility, rated 'B+' by S&P and 'B1' by Moody's Investors Service.
Fitch Ratings stated in a January report that securitizations similar to the one executed by Dunkin allows issuer’s to lock in fixed rate financing at attractive terms, relative to other forms of corporate financing. The annual fixed-rate weighted-average interest rate on the debt for similar franchise securitizations done in the past two years is in the 5% range or less, with that of Dunkin' at 3.765%.
The ratings agency expected the “securitization of franchise-related cash flow and assets to continue in the U.S. restaurants industry as more companies move toward nearly 100% franchised operating models and the market for these types of deals remains open. This will particularly be the case for non-investment grade franchisors that are comfortable maintaining high levels of leverage”.