Wednesday, 19 December 2018

Wendy's puts franchise bonds at top of the menu

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A whole-business securitization from burger chain Wendy’s has pushed annual supply in the asset class to a record high, with investors gobbling up deals that have become more mainstream.

The Wendy’s trade took this year’s WBS tally to US$7.425bn, above the previous record of around US$7.2bn in 2015, according to data from Guggenheim, which led many of the deals.

Many whole-business trades have come from companies such as Wendy’s, Domino’s and Dunkin’ Brands, chains with decades in the industry looking to make the most of historically low rates and more widespread demand from investors.

“On the issuer side, we’ve seen a fair amount of refinancing as spreads have tightened, and Wendy’s is a good example of that,” said Alexander Dennis, an analyst at S&P.

“But you’ve also seen an expansion of the investor base. Those that usually follow corporate credit have been getting up to speed on these securitization structures.”

Indeed, as with many WBS trades, buyside demand was strong. The deal, which was rated BBB by S&P, was heard to be more than five times covered - and was upsized to US$925m from US$875m.

A source close to the trade confirmed that a wide range of investors took part, including insurance companies and money managers.

“If you go back a year or two, there was still plenty of spread and it was still considered an estoeric asset class,” Jason Merrill, structured specialist at Penn Mutual Asset Management, told IFR.

“But investor sentiment has changed, and these are considered more of a credit product now.”



Wendy’s used franchise royalty payments from its more than 6,500 locations as collateral on the deal, which priced on Wednesday.

The US$450m 6.9-year tranche priced at 135bp over interpolated swaps, while the 9.6-year US$475m tranche priced at 158bp over interpolated swaps.

Those levels were pulled in from respective guidance of 140-145bp and 165-170bp.

The deal priced tighter than the 6.8-year and 9.6-year tranches on the Dunkin’ Brands refinancing from September - also rated Triple B - which cleared at 165bp and 190bp over interpolated swaps respectively.

The overall cost of the new Wendy’s debt, which had a blended coupon of about 3.73%, was only marginally higher than the 3.371% interest rate on the prior deal it was refinancing.

That is in spite of the roughly 7.5 times leverage on the trade, higher than the more typical leverage of high 5% to low 6% on most other WBS transactions, including those from Domino’s and Dunkin’, S&P said.

Though a factor for investors to consider, S&P’s Dennis said that WBS were able to withstand a sharp drop in cashflows - by an average 51% - before principal and interest payments on the securities were impacted.

“These deals include 30 years of royalty revenues,” said Dennis. “When you think about that, it’s a lot of cash flowing through to bondholders.”

Merrill at Penn Mutual described quick service restaurants like Wendy’s as cash cows.

“In a WBS structure, they become bankrupt remote,” said Merrill.

“So even if the company went bankrupt, the franchise could still operate via the backup manager as long as people still want to buy burgers.”

Wendy’s had to make a roughly US$5m make-whole payment to investors to refinance the 2015 debt early, as the right to call at par is not available until June next year.

But with ABS spreads at multi-year tights, it made sense to move early.

“With the Fed in play and rates moving up next year, it justified going to market early,” the source said.

Wendy’s will also use some of the proceeds for general corporate purposes, which may include returning capital to shareholders.

Guggenheim was structuring agent and joint bookrunner with Citigroup on the deal.


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