Those Burgers and Tacos Are Actually Backing Bonds

Restaurant chains like Wendy’s and the parents of Taco Bell and IHOP lead the way on esoteric asset-backed securities.


By Brian Chappatta, Bloomberg Opinion

June 10, 2019


Wendy’s. Domino’s. Dunkin’.


Jimmy John’s. Taco Bell. Sonic.


Applebee’s. IHOP. Five Guys. Arby’s.


Chances are most Americans know at least some of these restaurant chains, if not all of them. Combined, they have more than 60,000 stores with hundreds of thousands of workers at their franchisees. They all have an operating history that spans more than three decades.


What’s perhaps less well known is that they’ve been something of pioneers on Wall Street. Together, they and others like them back the overwhelming majority of esoteric asset-backed securities known as “whole business securitizations,” which have quietly become a large and growing part of the structured-finance market. They ring of the kind of alchemy that contributed to the financial crisis, but they are likely to remain popular with yield-hungry investors. 


The securities are about as straightforward as the name implies — franchise-focused companies sell virtually all of their revenue-generating assets (thus, “whole business”) into bankruptcy-remote, special-purpose entities. Investors then buy pieces of the securitizations, which tend to have credit ratings five or six levels higher than the companies themselves, according to S&P Global Ratings. Creditors take comfort in knowing the cash flows are isolated from bankruptcy. The restaurants get significantly cheaper financing.


Cumulative gross issuance of whole-business securitizations reached about $35 billion at the end of 2018, compared with about $13 billion just four years earlier, according to S&P. The past two years have been banner years for the structures, with $7.9 billion offered in 2017 and $6.6 billion last year, according to data from Bloomberg News’s Charles Williams.


Things have been slower in 2019, though they look to be picking up. In late May, Dine Brands Global Inc., the parent company overseeing the Applebee’s and IHOP brands, completed a $1.3 billion refinancing of its senior notes from 2014. The Wendy’s Co. will be in the market soon, also to refinance a previous offering. And in a non-restaurant offering, private-equity-backed spa chain Massage Envy LLC is planning to sell $425 million in its inaugural whole-business securitization, Bloomberg News’s Claire Boston reported.


Wendy’s credit rating is five levels below investment grade from S&P and Moody’s Investors Service, yet its ABS are triple-B. That’s the same rating as Dine Brands got on its recent offering. “Dine’s asset-light business model provides us with access to the attractive securitization market,” Thomas Song, the company’s chief financial officer, said in a statement.


In the post-financial-crisis world, it’s easy to be immediately skeptical of anything that looks like a somewhat new and complex structured product. In reality, most transactions are done for smart and specific reasons.


Yes, whole-business securitizations have some downsides...


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