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john a. gordon's picture

Franchisor Asset Based Securitization, Whats going On

Don: thanks for capturing and publishing this article about asset based securitizations (ABS).

Other franchisor ABS actions are in the works now. Some franchisors have such high debt and interest rates that the "deal" will pencil out. 

I'll let franchisees speak up, but the ABS possibly may result in lower interest costs for the franchisor (always a good thing for the system) but will result in another entity, the insurer, having a lien on the franchisor's royalty stream. That could be a bad thing as experienced by Dunkin Brands (DBI) when its insurer in 2009, AMBAC, filed Chapter11. 

Things got dicey for a time but DBI was able to refinance based on the franchsing model and the strengths of its franchisees. Only the franchisees have cash registers and serve customers.

If another global financial pandemic occurs, other ABS insurers could take the hit. Then the franchisor will have to refinance again. 

Edward Ryan's picture

Franchise Asset Backed Securitization

BMM asks:
1) If your franchisor could bundle anticipated franchisee royalties and receive a hundred million dollars or more by owing bond holders, what benefits might you gain from that?

Franchisees receive no benefits from the proceeds of Franchisor securitization deals. For franchisees, it becomes critical that they carefully monitor their franchisor's capital structure in the post-securitization environment. Generally, a whole business securitization puts restraints on how the franchisor entity can freely use it's royalty revenue streams. Capital reinvestment by the franchisor is not a primary function with R&D falling under marketing activities paid for by the franchisees.

2) How might it harm your business?

If a franchisor is acquired in a leveraged buyout, franchisees should be very concerned. When a franchisor is highly leveraged, they are counting on a specific revenue stream to meet bondholder payments. If system wide sales fall below a certain percentage, the franchisor must increase its revenue stream from its customers - the franchisees. Although the royalty fees are fixed by contract, the franchisees will ultimately face increasing cost of goods sold and other increases in expenses paid to the franchisor. After all, franchisors pass on their additional cost on to the their customers.

3) How would you know if your franchisor underwent a whole business securitization?

Franchisor entities will change and those changes are documented in the annual FDD. A description of the securitization structure would also be discussed but a very confusing read. How many existing franchisees actually pay attention to the annual changes in the FDD? Hence, having a strong IndFA is essential to be vigilant and stay on top of the franchisor's business activities.