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Sonic Negotiates Hundreds of Millions in Securitization

OKLAHOMA CITY—Sonic Corp. (NASDAQ:SONC), a chain of 3,500 drive-in restaurants, announced last week that it will be dipping into business securitization for debt based on future fees that its franchisees are expected to pay the franchisor. Sonic has negotiated to receive $425 million in a 4.472 percent fixed rate senior secured note with an expected life of seven years.

The franchisor will need to pay its noteholders monthly.

"I think Sonic will be fine with this debt," says John Gordon, principal and founder of San Diego-based Pacific Management Consulting Group. He expects Sonic has negotiated lower interest rates on its old outstanding notes to its benefit.

A number of Sonic's subsidiary firms have entered into an additional $150 million line with note holders for a revolving credit facility.

The companies involved in the transaction are indirect subsidiaries of Sonic Corp. These complex structures are organized as a securitization firewall against liability by Sonic Corp. from note holders. It is these associated firms that own on paper substantially all of the Sonic system's franchising assets [revenue from franchise royalties and fees] and real estate. It is these firms that will be issuing the senior notes.

The servicing and repayment of the notes will be made solely from the cash flows derived from these indirect subsidiaries' assets.

Restaurant unit analyst Gordon thinks that with 90 percent of Sonic branded restaurants being franchised, Sonic is in a good cash flow position where it really does not need much additional capital. Although with so much additional funds, Sonic could give the businesses of its franchise owners a break in royalty and fees, or help those franchised businesses with store upgrades, it is highly unlikely it will do so. "Sonic has probably negotiated the new $150 million line of credit in order to buy back stocks and push up Sonic's earnings per share at the right time," reasons the analyst.

Sonic Corp. expects the transactions on the debt to close on May 17, 2016. The notes will not be registered under the U.S. Securities Act.

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.