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Engaging in the successful securitization financing of a franchisor's royalty stream and/or other sources of revenue can be a complex endeavor. It requires a particularly sophisticated skill set to enable the franchisor to take advantage of the markedly lower finance costs (versus conventional bank financing) typically associated with this type of financing transaction.
Although securitizing receivables is hardly a novel concept-the technique has been used over the past thirty years to collateralize mortgage, credit card, health care, and automobile lease receivables, among others-no successful securitization of a franchisor's royalty stream had ever been achieved until 2000, when Arby's, Inc. (now Arby's Restaurant Group) raised $290 million through the securitization of the Arby's royalty stream (a securitization subsequently, and successfully, closed out through repayment of the securitization notes).
Since then, securitization has proven more and more integral to the financing plans of many of our nation's largest franchisors. In the past seven years alone, the following companies have turned to securitization as a means of raising funds for any of a number of strategic reasons (system expansion; acquisitions; or retirement of existmg, expensive debt).
* The Blackstone Group/Hilton Hotels Corporation ($21 billion) (planned for 2008)
* Dunkin' Brands, Inc. ($1.6 billion)
* Domino's Pizza LLC ($ 1.7 billion)
* Applebee's Enterprises LLC ($ 1.794 billion)
* Sonic Corporation ($600 million)
* Quizno's (confidential)
* IHOP Franchising, LLC ($245 million)
What is driving the explosive growth of securitization in the franchise arena? The answer is simple: economics. A franchisor seeking to borrow funds can typically save upwards of 200 basis points a year by going the securitization route instead of establishing bank credit facilities or engaging in a traditional debt offering. The first year's savings are not truly savings at all; they typically will be offset by the significant legal, underwriting, rating agency, insurance, and other credit enhancement fees required to consummate the securitization transaction. After the first year, however, the savings to be enjoyed by a franchisor engaging in a royalty securitization versus conventional bank financing can prove compelling.
Since the first successful franchise securitization involving Arby's in 2000, securitization transactions have evolved and feature yet additional benefits for franchisors, such as favorable amortization terms, limited covenants, and a high level of marketability.
These finance...