Fitch: Restaurant ABS Rise to Extract Shareholder Value
According to Fitch Ratings, highly franchised U.S. restaurants are increasingly using securitizations in order to extract value for shareholders.
Fitch said Dunkin’ Brands Group highlighted that strategy this week when they completed a $2.6 billion securitization of its revenue-generating assets, consisting principally of franchise and licensing agreements, real estate, and intellectual property, to refinance the company’s existing $1.9 billion senior secured credit facility.
This refinancing follows similar transactions in the U.S. restaurants space, including that of DineEquity, which issued $1.3 billion in a private securitization offering in September 2014.
Fitch notes that whole-company securitizations are commonly used by highly franchised non-investment grade restaurant chains, like Dunkin’ and DineEquity that generate a stable stream of high-margin royalty and fee-based revenue to lock in low-cost long-term financing and to utilize their balance sheets to create value for shareholders.
The capital structures of Domino’s Pizza and Sonic, which are also more than 90% franchised, already consist mainly of securitized debt. The annual fixed-rate weighted-average interest rate on the debt for all of these companies is in the 5% range or less, with that of Dunkin’ at 3.765% and DineEquity’s at 4.277%.
Fitch said it expects the securitization of franchise-related cash flow and assets to continue in the U.S. restaurants industry as more companies move toward nearly 100% franchised operating models and the market for these types of deals remains open. This will particularly be the case for non-investment grade franchisors that are comfortable maintaining high levels of leverage.
To read the entire Fitch Ratings report, click here.