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Wingstop latest fast-casual restaurant to issue whole biz ABS

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Wingstop, the fast-casual chicken restaurant, is tapping the securitization market to refinance its senior secured credit facility.

On Tuesday, the company launched an offering of $325 million of bonds backed by existing and future franchise and development agreements, existing and future company-operated restaurant royalties, certain vendor rebate contracts and intellectual property, according to Kroll Bond Rating Agency.

Wingstop had previously disclosed plans to use proceeds from a securitization to repay its $215.4 million outstanding credit facility, pay transaction costs and for general corporate purposes,which could include the return of cash to shareholders.

It joins a long list of fast-casual restaurant chains to issue what are known as whole business securitizations. This year alone, Focus Brands, Planet Fitness, CKE Restaurant Holdings and Sonic have issued or refinanced bond backed by franchise fees and royalties.

Unlike recent Kroll-rated deals from CKE’s Hardee’s/Carl’s Jr brands in May 2018 and Five Guys and Cajun Global in 2017, the collateral for Wingstop’s deal does not include profits from company-owned restaurants, however.

Wingstop’s deal is also more highly leveraged, as measured by debt/securitized cash flow, at 5.7 times, higher than 5.6x for Hardee’s/Carl’s Jr. and Five Guys and 5.5x for Cajun Global. Nevertheless, all four deals carry the same BBB rating from Kroll.

Two tranches of notes will be issued in Wingstop’s transaction: $25 million of variable-rate notes and $300 million of term notes.

Barclays Capital is the sole structuring advisor and sole active book-running manager.

Among the strengths of the deal, according to Kroll, is that Wingstop’s operating model is efficient, requiring few ingredients and easy preparation within a small, flexible real estate footprint. This model helps to facilitate carry-out orders, which constitutes approximately 75% of total sales. The company has experienced 14 consecutive years of positive domestic same store sales growth.

Wingstop also has a diverse franchise base; there are 300 franchisees and the average franchisee owns approximately 3.9 units. The average original tenure of franchisees in the Wingstop system is approximately eight years. Kroll believes that this diversification provides endurance during periods of economic stress. “A large franchisee base can result in a more stable stream of recurring royalty cash flows that is more easily transferable if the company’s performance deteriorates, causing potential transfer of management functions if certain triggers are breached,” the presale report states.

However, volatile commodity prices are a potential concern. Wingstop’s core offerings consist of bone-in and boneless chicken wings, which account for approximately 65% total systemwide purchases. There has been a sizable fluctuation in chicken and wing prices in recent years; bone-in chicken wing prices in 2017 averaged 18% higher than in 2016. “Ongoing commodity cost pressures could adversely affect future operating results and profitability of company-operated and franchised locations,” the report states.

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Whole business securitization Esoteric ABS