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Whole-biz securitizations face downgrade threat from COVID-driven shutdowns

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The closure of restaurants and retail/services stores to fight the spread of the U.S. coronavirus outbreak has curtailed a broad base of customer traffic and revenues at franchised chains.

But S&P Global Ratings is raising concerns over the near-term cash drain from three chains in particular, operators which are servicing a combined $3.8 billion in outstanding royalty and fee-income securitizations.

The ratings agency has placed a negative credit watch on nine note tranches issued from the whole-business securitization trusts sponsored by the corporate parents of the TGI Friday’s, Applebee’s/IHOP and Planet Fitness chains.

The negative watch means taht ratings from the whole business securitizations – ranging from BBB to BB+ – could be downgraded after a 90-day review period.

TGI Friday’s, Applebee’s and Planet Fitness each face revenue strains that are “particularly severe,” S&P noted in a report issued Wednesday. “While other whole business concepts have the potential to mitigate revenue declines by relying on already well-diversified sales channels, these four concepts currently have greater challenges in this area, in our view,” the ratings agency reported.

Applebee’s, IHOP and TGI Friday’s “rely primarily on dine-in foot traffic,” S&P stated, while Planet Fitness has shut down approximately 2,000 of its franchisee-owned fitness center gyms – along with voluntarily curtailing membership dues while the shutdown is in effect.

“Both of these situations suggest a significant forthcoming decline in securitization revenue that will place significant stress on each transaction,” S&P’s report stated.

S&P warned in a March 18 report that the impact of the COVID-19 pandemic could result in negative rating changes for whole-business securitizations.

Applebee’s Funding/IHOP Funding LLC has three classes of outstanding senior secured notes issued in 2019 totaling $1.525 billion. The notes – all rated BBB, or two notches above speculative-grade status – are secured by the revenue streams of corporate-owned and franchisee-operated stores operated by Dine Brands Global Inc. The company drew $223 million of the $225 million available under its series 2019-1 variable funding notes from the transaction, in order to provide some financial flexibility for Dine Inc. as both concepts look to diversify with more carry-out/delivery services.

(Draws on variable-funding notes does not impact S&P’s decision to place the notes under a credit watch, according to agency, since the initial ratings analysis is done under the presumption of fully-drawn VFNs).

TGIF Funding LLC’s $450 million in 2017-1 series notes are secured by revenues from TGIF’s international footprint of restaurants across 57 countries, including 39 U.S. states and the District of Columbia. Over 80% of its units have temporarily closed off dine-in services, either voluntarily or from local or state mandates.

The notes were previously downgraded to a speculative-grade BB+ rating in February 2019.

As with Applebee’s, TGI Friday’s is exploring more diversity in revenue streams in jurisdictions that allow home delivery of alcoholic beverages.

The Planet Fitness Master Issuer LLC notes under watch are from 2018 and 2019 issues, totaling a combined $1.825 billion, issued from its master trust. The four classes of notes all carry investment-grade BBB ratings. Besides membership dues and other store profits, the company earns a profit margin from branded fitness equipment it sells directly to franchisees.

Planet Fitness is countering the current cash-flow drought by redirecting residual cash flows into debt service that will cover first-quarter principal and interest payments, and partially fund second quarter P&I obligations, according to S&P. The company will also assign revenue from membership dues collected through mid-March into P&I payments to WBS investors.

The gym operator has also drawn the full $75 million available from its VFN facility.

S&P will review the ratings in 90 days.

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Whole business securitization Ratings Bond ratings S&P