CIT Group: Non-Performing Franchisee Loan Data Needed

In looking at CITs last few earnings calls, its February 2009 investor presentation (www.cit.com), as well as todays (Friday, July 17) Wall Street Journal (http:online.wsj.com/home-page ), we need to know the breakout of CIT's non-performing loans.

CIT supports a boatload of franchisors/franchisees, especially the mass franchisors like Dunkin Brands, and many others..

The Friday WSJ listed CIT net charge offs of $211M in corporate finance, only $1.4M in transportation finance, $22.3M in trade finance, $41.5M in vendor finance and $36.7M in consumer finance (all Q1 2009 data).  So where's the franchisee data?    

Its been long noted here on BMM that lenders cash flow projections and the SBA documents and associated projections are/have been contrived, way too optimistic.

Of course, thats true in alot of corporate M&A deals, too. For example, chain restaurant M&A deals were in a 6 to 7 EBITDA multiple range, forever, from 1980 to 2005. Then, from 2005 to early 2008, the multiples zoomed to the 9-11 times EBITDA range. Interestingly, two big mass franchisors were among the highest: Dunking Brands at a 12.8 times multiple (2005) and Krispy Kreme at 21.4 times EBITDA (2008). Both of these companies have trouble--KK spoke to franchisee closures last quarter and we know via BMM that Dunlkin has had thee multi-unit franchisees file for Chapter-11 reorganization in the last 45 days.

We bet they are not running the same EBITDA/debt service ratios they thought back then. 

Even the publicly traded chain restaurant franchisors rarely, if ever, discuss franchisee financial performance, let alone private companies like Dunkin.  And we know the large zors need a continual flow of  franchisees and outside loan money to power their system. 

Since there is current debate about the value of CIT to 'Main Street', the franchisee specific loan charge off data would help refine the public policy debate. And it may tell us if the large zors will need to become banks themselves, to fund new franchisee activity.

John A. Gordon

Chain Restaurant Earnings and Economics Experts

www.pacificmanagementconsultinggroup.com

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