Deals: 1

Proceeds: $115 million

Products: Loans to franchised auto dealerships

Underwriter: Goldman, Sachs & Co.

"As with most industries, franchise lending appears to be headed toward greater consolidation among industry participants. Companies who compete directly among each other within specific asset types will find greater compression on origination spreads and may find themselves forced into corporate merger or consolidation. Those companies who focus on niche areas should face less competition and should, therefore, have a greater ability to maintain their present corporate structure.

"Our industry's greatest challenge is restoring investor confidence in the asset class. This can be accomplished through continued emphasis on loan servicing and proactively addressing potential problems within existing pools. Further, issuers will need to go the extra distance toward educating and reassuring investors as to the integrity of their loan origination policies and procedures."

Last fall Falcon Financial, LLC brought the first deal backed by loans to franchised auto dealerships, an industry the lender has been exclusively focusing on for the past four years.

While Falcon evaluates all potential sources of capitalization - including the whole loan market - the company's current funding strategy is securitization on a periodic basis. Falcon plans to tap the market this quarter with a $125 million deal which will be managed by Goldman, Sachs & Co. The company anticipates significant growth in origination this year.

Falcon Loan Trust Certificates, Series 1999-1 is currently demonstrating a weighted average of fixed charge coverage ratios (FCCRs) of 2.12X as compared to 1.69X at origination, the company said.

Though considered non-traditional franchise lending - in the sense that traditional franchise lending encompasses quick service restaurant and convenience stores - the deals are marketed to the same investor base as other franchise ABS, and, from a ratings point of view, a similar cash flow analysis is performed.

Falcon Financial is headquartered in Stamford, Conn. and markets its loans nationally.


Deals: 5

Proceeds: roughly $2 billion

Products: Loans to restaurant, convenience stores and automotive parts and services sectors

Underwriter: Morgan Stanley Dean Witter

"Information is absolute key. Issuers have to be responsive to investor questions and be prompt in delivering reports and submitting information. They should not be bound by what the private memorandums indicate is the servicing requirement, that should be a minimum. They should go beyond that if they feel it's necessary.

"The downgrades really reflect the performance of some loans, the majority of which are enterprise loans. This shows that the enterprise loan component has a higher measure of risk.

"I do not view the defaults and the downgrades that we've seen to be indicating that there are pervasive problems with the industries themselves, which have been performing in a fairly consistent fashion. We've not seen a downturn in the credit profile of the industries that we finance."

Though Franchise Finance Corporation of America has entered into a long-term agreement to sell whole loans to Washington Mutual Inc. (roughly $500 million by year end), it still plans to access the securitization market going forward starting with a $400 million to $500 million transaction in the third quarter. The company has worked with Morgan Stanley Dean Witter in its last three deals.

The Scottsdale, Ariz.-based company, which is involved in the restaurant, convenience stores and automotive parts and services sectors, has been in the franchise loan business since 1980. With roughly $2 billion in proceeds from its securitizations, it has become the second most prolific issuer of franchise loans, behind industry leader FMAC.

Currently, FFCA has three special servicing assets in its securitized pools, two of which were placed in bankruptcy-remote entities.

FFCA originates all its loans, as opposed to third party origination. The company is also servicer and special servicer to its transactions. FFCA conducts quarterly surveys and regularly publishes industry reviews on both the chain-restaurant and convenience store businesses.

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