What the Heck Is Securitization?
Courtesy of Guggenheim Securities
Securitization has been a hot topic for other industries in the past. But now, some of the biggest franchised brands are turning to securitization to finance their companies.
“It’s become the most common form of financing for large franchisors,” said Spencer Hart, of Guggenheim Securities at the 2017 Restaurant Finance and Development Conference.
But what is it?
In a nutshell, it means putting all sorts of contractual debt instruments like franchise agreements into a pool, then selling those cash flows to investors as securities.
A decade ago, just Quizno’s used securitization as a financing vehicle. But today, it’s a long list. Everyone from Arby’s to Yum and some of the biggest names in between have securitized their cash flows for one big reason: refranchising. Almost every brand to the right has significantly increased their franchisee pool, hence more cash coming in from operators.
“It’s not surprising, if you have more franchisees you can add more debt,” said Hart.
That means more money for reinvesting into the company, more corporate unit growth, more money for the franchisee support system and, of course, stock buybacks which many public companies have been doing aggressively in the past few years.
There are other perks, too. Hart said securitized companies are able to get lower interest rates, better covenants and covenants that are a little more flexible when compared to traditional bank-debt covenants that tighten as time goes on.
It also allows for a new body of investors.
“When we issue securities out of that new body, you can issue investment-grade rated securities,” said Hart. “And some issuers are required to invest in investment-grade rated companies only.”
Essentially, that means banks and other major institutional investors are able to invest in the attractive asset-light, franchise business with the advantage of having an asset that is rated as very likely to make payments.
And in this very busy M&A period, there is another perk, what Hart calls a “portable capital structure.”
Since everything is pooled together, it’s much easier to sell the company because there isn’t that messy untangling of the core company, the headquarters and any other brands that the parent company might have.
“So in an M&A transaction, the debt goes with the buyer. That can create a lot of value in an M&A transaction,” said Hart.
That’s not to say, however, that any company that goes with a securitization is looking for a buyer. Another major perk for companies that meet the requirements (large, seasoned and asset-light) securitization also means fewer restrictions on what the company can do with the investment cash compared to a standard banking relationship.