Wendy’s Co. (Nasdaq: WEN) is returning to the whole business securization market for the first time in three years with a $1.03 billion transaction.

Three tranches of notes will be issued via Wendy’s Funding LLC Series (WEN) 2018-1: $150 million of Class A-1 variable funding series totaling $150 million maturing in 2023; an A-2-1 $400 million series due 2025 and an A-2-II series of notes adding up to $475 million, due 2028. The notes carry a preliminary triple-B rating from S&P Global Ratings.

The notes are backed by royalty and franchisee payments, licenses, net rental income and profit distributions from the 6,551 stores in the Wendy’s chain. Wendy’s Co. will use $858 million of the proceeds to repay notes still outstanding from a $2.28 billion whole business transaction completed in 2015.

Bloomberg News

The deal goes to market as Wendy's copes with disappointing third-quarter earnings. It missed profits and sales marks and lowered its full-year earnings forecast after Hurricanes Harvey and Irma cut into its customer traffic in Texas and Florida.

WEN 2018-1 is not expected to close until January, which will make it the first whole-biz deal of 2018. But it folllows what has been a banner year for whole-biz securitizations, which grew to $6.65 billion in bond issuance after a dormant second half of 2016.

Like Wendy's, many of the franchise fee securitizations this year were from repeat issuers, including Dunkin’ Brands ($1.55 billion) and Domino’s ($1.9 billion). There were also some newcomers such as Jimmy John’s ($800 million) and Five Guys ($400 million).

Also making debut were firms outside of the dining category. The UK’s Center Parcs Group sold investors the cash flow from its vacation cabin and lodge rentals, while Coinstar ($840 million) used revenue from its vending kiosks to market bonds that paid off secured debt and funded a dividend to private equity sponsor Apollo Global Management.

A whole business securitization such as WEN 2018-1 allows Wendy’s, a single-B-rated firm, to access cheaper funding than from secured debt offerings. By offloading its revenue-generating assets into a trust (Wendy’s Funding LLC) that pays bondholders directly, Wendy’s can raise achieve a BBB rating from S&P.

Ratings agency reports noted that Wendy’s Co. is one of the higher-leveraged franchisees to access this type of financing. The company this year completed a $1.4 billion debt-fueled share repurchase program that launched in 2015, still leaving it with debt-adjusted EBITDA of 6.9x as of April 2017, according to Moody’s Investors Service.

S&P estimates its debt-to-earnings will be at 7.3x at the closing of the WEN 2018-1 deal, as compared to Five Guys Funding LLC’s 6.7x and the 6.4x for Driven Brands Funding LLC. The company's third-quarter earnings were down substantially due to the loss of business in its heavy concentration of stores in Florida and Texas. Both states represent its No.1 and No.3 markets, causing a 30 to 40 basis point drop in same-store sales year-over-year, according to the earnings reports.

But revenue was also down (15.4%) because of the continued decline in the number of company-owned stores. Wendy's began divesting of corporate-owned locations in favor of franchisee-owned stores beginning in 2015, having increased the ratio of franchises to 95% from 85% in 2014.

It has also had a net decline in the number of stores in its chain for five consecutive years, partially attributed to Wendy’s “buy and flip” strategy of rolling over existing franchises stores to new owners rather than organic growth in new locations. Wendy’s has overseen 690 store transfers since 2015, according to S&P’s presale report.

The chain has seen only a 1.4% cumulative average growth in sales annually since 2006.

Guggenheim Securities was the sole structuring adviser and joint lead active book-runner. Wells Fargo and Rabo Securities were co-managers.

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