First came property-backed bond and loan financings for the new mega US leveraged buyouts, then the securitization of Hertz’s vehicle fleet. Now bankers are working on a securitization of franchise royalties to refinance the loan financing supporting the $2.43 billion buyout of Dunkin’ Brands by Bain Capital Partners, the Carlyle Group and Thomas H Lee partners announced at the end of last year.
JPMorgan and Lehman Brothers want to sell $1.5 billion of notes secured by franchise royalty receivables from Dunkin’ Brands franchised outlets, to repay the interim loan financing.
This is not the first time US retailers have done securitization deals. In February 2005, fast-food sandwich retailer Quiznos did a securitization of its future franchise royalties and in 2003 fashion retailer Guess did a similar deal, securitizing its global licensing revenue. However, if the Dunkin’ Brands securitization is successful, it will be the first time this technique has been used in the context of an LBO.
Although he will not comment on the specifics of the Dunkin’ Brands financing, Eric Hedman, director in Standard & Poor’s structured finance new assets group, says that rating these sorts of revenue streams involved taking into account many different moving parts. “You have to look at the linkage between the franchiser and the franchisee, what happens if the franchiser goes into bankruptcy, who controls the supply chain, who’s involved in the advertising and marketing of the brand. You also need to be able to access the value of the brand itself, assuming that the parent company goes into bankruptcy.”
The Dunkin’ Donuts brand is particularly powerful, as it vies with Starbucks to be the biggest coffee retailer in the US
As sponsors are going after larger companies, and taking on more leverage as a result, they are having to get creative with the financing in order to lower the average cost of capital. “By using asset-backed or revenue-backed techniques, you can put much more leverage on an LBO target than you could through a traditional bank and bond financing.”
The leverage on the Dunkin’ Brands buyout is very high at 8.5 times, which is the reason Standard & Poor’s has given the company a B– corporate rating with a negative outlook, so the sponsors certainly have the need to attract cheaper financing. However, are franchise revenue securitizations workable in highly leveraged companies where earnings to interest cover is also very slim? After all, the amount of financial risk the company is exposed to is a key determinant to how these deals are rated.
Winston Chang, another director in Standard & Poor’s new assets group, says that high leverage is not a problem as long as the company is suitable for securitization in the first place. “Any good securitization candidate that has a strong track record and steady cashflows, which are also bankruptcy remote, might reach leverage points which are comparable to that which you might see in a LBO.”
