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Wendy's sponsoring a $1B whole-biz refinancing transaction

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Wendy’s International LLC will be returning to whole-business securitization investors seeking funds to refinance its existing asset-backed debt. But the new proceeds could maintain the burger-chain franchisor’s sky-high operations leverage.

According to a presale report Wednesday from S&P Global Ratings, the Wendy’s Funding LLC master trust is planning a $1 billion, 2019-1 series of notes with staggered maturities between 2024 and 2029. The offerings include a $150 million Class A-1 variable funding note and two Class A-2 term note tranches of $425 million apiece.

All of the bonds carry preliminary investment-grade BBB ratings.

Wendy’s will use $869 million of the proceeds to pay outstanding securitization debt. Wendy’s Funding has previously issued $2.425 billion in whole-business backed notes in 2015 and $1.075 billion through a fixed-rate issuance in 2017 that had partially refinanced the inaugural deal two years earlier.

The resulting 6.6x of adjusted leverage places Wendy’s at the high-end of franchise-fee securitization sponsors that have a range of 4.8x (Focus Brands) and 6.8x (Driven Brands).

As with whole-business ABS structures, Wendy’s will transfer nearly all the cash-generating assets into the bankruptcy-remote trust, including fees, income and royalties earned from the chain’s 5,825 U.S. franchisee-owned stores and 527 internationally franchised locations. About 95% of the 50-year-old company’s 6,710 locations worldwide are franchised.

Wendy’s has recently experienced slow store-growth levels, with a 0.2% compounded annual growth rate since 2011. The flat performance is primarily the result of Wendy’s corporate focus on converting company-owned stores to franchise operations to achieve the current 95% target (rising from the 81% franchisee-owned level in 2016). But Wendy’s picked up the pace by adding 77 franchisee stores in 2018.

Wendy’s has also been engaged in a “buy and flip” strategy to transfer existing stores from longtime (and presumably lower-performing) franchisees to new franchisee ownership groups.

Citibank is the joint lead active bookrunner. Wells Fargo, JPMorgan, Rabo Securities and RBC are co-managers.

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Whole business securitization