Atherton Capital

Deals: 7

Total Proceeds: $900 million

Products: Loans to restaurant, retail petroleum and specialty retail sectors

Underwriters: PaineWebber, Lehman Brothers, Salomon Smith Barney

David Elder, chief executive officer

"Other than debt market volatility, a fact of life since 1998, the current dearth of new debt securities is the result of a few not altogether unexpected incidents currently being experienced by two sponsors.

"The franchise businesses served are intrinsically solid. Lenders will need to be diligent and disciplined in their underwriting, loan sizing, pricing and hedging to protect themselves and their bondholders. Discipline will return to the market and those sponsors that have underperformed will find capital hard to come by and those lenders that have exercised discretion should benefit. Lenders will have to avoid creating future problems such as those arising from inadequately collateralized leaseholds, quite common in the restaurant business, or lending into overly aggressive acquisitions made by under capitalized operators, currently a dilemma in the retail petroleum business."

As part of its strategy to access the market that would bring the company the most benefit, Atherton Capital Inc. is exploring other alternatives to securitizing franchise loans. Last March, it sold over $200 million of whole loans. In the fall, it is planning another similarly sized transaction which may come in the form of a securitization or whole-loan sale depending on market conditions.

The San Bruno, Calif-based firm has already established or is working on programs to supply franchise loans to a thrift, a real estate investment trust (REIT), banking institutions, credit companies and Wall Street firms in the whole loan, commercial mortgage-backed securities and ABS arenas. This is based on the philosophy that each of these product groups has a different product appetite and perspective that creates a diversified product line and exit strategy for Atherton.

The company, which is currently lending to 55 branded retail systems, is projecting to hit roughly $400 million in origination in 2000 and $550 million in 2001. Since its establishment in 1989, Atherton originated over $1.2 billion.

Morgan Stanley Dean Witter

Michael Dubeck, Principal in the Securitized Product Group

"From a capital market perspective, it makes sense that this market will likely see a tiering effect similar to the CMBS market. This will be driven by investor perceptions of issuer loan quality, underwriting and servicing. Issuers differ in their philosophy, approach to loan underwriting and methods for calculating coverage ratios. Investors have gained a better understanding of the origination process and differences among issuers as the market has developed. They have expressed an increased desire to understand, in detail, an issuers approach to underwriting.

"Investors are also demanding an increased level of reporting and monitoring on a regular basis on the part of the servicer. This is a very positive step in that it will cause a sustained dialogue between investors and originators. Investors will benefit from an increased level of transparency to the credits in the sector, while issuers will benefit from a better understanding of investor preferences and have incentive to a more conscientious servicing standard.

"Generally, we feel that the recent incidences are isolated in nature. Market participants need to decide for themselves whether individual incidences are due to events at the specific borrower level or due to poor underwriting at the issuer level. Although defaults in some deals have been high as a percent of balance, the problems have actually been limited to a handful of credits, so there probably isn't enough evidence."

Though Morgan Stanley Dean Witter has not yet issued franchise loan-backed ABS, the bank has been a key underwriter in the industry. MDSW was lead manager on deals for Franchise Finance Corporation of America and Enterprise Mortgage Acceptance Corp.

The company is currently originating loans for its own account and will be an issuer in the sector down the line.

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