How Are Planet Fitness and IHOP Securitizations Doing Now?
Wall Street's structured products for brand-name chains such
as Applebee’s and TGI Friday’s are under unexpected
pressure from Covid-19.
as Applebee’s and TGI Friday’s are under unexpected
pressure from Covid-19.
By Brian Chappatta
June 30, 2020, 11:00 AM GMT+1
Brian Chappatta is a Bloomberg Opinion columnist covering
debt markets. He previously covered bonds for Bloomberg News. He is also a CFA
charterholder.
debt markets. He previously covered bonds for Bloomberg News. He is also a CFA
charterholder.
It looked like the
perfect feat of Wall Street ingenuity. Then the coronavirus pandemic
struck.
perfect feat of Wall Street ingenuity. Then the coronavirus pandemic
struck.
For the past few years, asset-backed securities known
as “whole business securitizations”
had become a steadily growing presence in the structured-finance market.
Chain restaurants like Dunkin’,
Hooters, TGI Friday’s and Wendy’s were among the first to take up bankers on
this process, which involves
companies selling almost all revenue-generating assets into bankruptcy-remote,
special-purpose entities in exchange for investment-grade credit ratings
and much cheaper financing. More recently, other franchise-focused
enterprises like Planet Fitness Inc. and Massage Envy LLC followed.
as “whole business securitizations”
had become a steadily growing presence in the structured-finance market.
Chain restaurants like Dunkin’,
Hooters, TGI Friday’s and Wendy’s were among the first to take up bankers on
this process, which involves
companies selling almost all revenue-generating assets into bankruptcy-remote,
special-purpose entities in exchange for investment-grade credit ratings
and much cheaper financing. More recently, other franchise-focused
enterprises like Planet Fitness Inc. and Massage Envy LLC followed.
There’s a lot to like about these securities for
fixed-income investors. They usually offer higher
yields than comparably rated corporate bonds, for one. They’re backed by
cash flow from hundreds, if not thousands, of individual locations across
the country that each have unique demand
dynamics and would likely keep operating and sending money to investors
even if the parent company filed for bankruptcy.
fixed-income investors. They usually offer higher
yields than comparably rated corporate bonds, for one. They’re backed by
cash flow from hundreds, if not thousands, of individual locations across
the country that each have unique demand
dynamics and would likely keep operating and sending money to investors
even if the parent company filed for bankruptcy.
You might be able to guess where the story goes from here.
Yes, some securitizations are doing fine, like Domino’s Pizza Inc., whose stock
price reached a record this month. And Driven Brands, which has more than 3,200
automotive services shops across 49 U.S. states and all Canadian provinces,
successfully priced $175 million of debt on Friday in the first such deal since
March. But a handful of the bonds are showing signs of cracking under pressure
from Covid-19. Specifically, restaurants that are overwhelmingly dine-in or
concentrated in malls, as well as the aforementioned Planet Fitness and Massage
Envy.
Yes, some securitizations are doing fine, like Domino’s Pizza Inc., whose stock
price reached a record this month. And Driven Brands, which has more than 3,200
automotive services shops across 49 U.S. states and all Canadian provinces,
successfully priced $175 million of debt on Friday in the first such deal since
March. But a handful of the bonds are showing signs of cracking under pressure
from Covid-19. Specifically, restaurants that are overwhelmingly dine-in or
concentrated in malls, as well as the aforementioned Planet Fitness and Massage
Envy.
Consider Dine Brands Global Inc., the parent of the Applebee’s and IHOP brands. Obviously,
it’s hardly a boom time for going out for breakfast. Its whole-business
securitization from 2019, rated triple-B by S&P Global Ratings, traded at
more than 100 cents on the dollar on March 11, then tumbled to about 77 cents
in April, Trace data show. While trading in this kind of debt is relatively
sparse, it seems to have rebounded to 87 cents, equivalent to a yield of
about 8%. The average junk bond yields 6.77%, according to a Bloomberg
Barclays index.
it’s hardly a boom time for going out for breakfast. Its whole-business
securitization from 2019, rated triple-B by S&P Global Ratings, traded at
more than 100 cents on the dollar on March 11, then tumbled to about 77 cents
in April, Trace data show. While trading in this kind of debt is relatively
sparse, it seems to have rebounded to 87 cents, equivalent to a yield of
about 8%. The average junk bond yields 6.77%, according to a Bloomberg
Barclays index.
S&P said in a report last week that it could lower the
transaction’s ratings within the next three months, given the sharp drop in
dine-in revenue. In a sign of how serious this is for Dine Brands, it’s waiving
its right to a management fee at least through the beginning of September and
has redirected the residual to pre-fund debt service, S&P said. Dine
Brands also voluntarily doubled the interest reserve to $32.8 million
from $16.4 million.
transaction’s ratings within the next three months, given the sharp drop in
dine-in revenue. In a sign of how serious this is for Dine Brands, it’s waiving
its right to a management fee at least through the beginning of September and
has redirected the residual to pre-fund debt service, S&P said. Dine
Brands also voluntarily doubled the interest reserve to $32.8 million
from $16.4 million.
At least in S&P’s view, the situation is even worse for TGI Friday’s, which had already cut
total restaurants to 796 in March from 894 three years earlier. In mid-May, the
rating agency downgraded the chain’s 2017 notes to B+, four steps below
investment grade, and said there’s a 50-50 chance it would drop it even
further. “Though the pandemic has placed significant stress on the restaurant
industry broadly, we believe TGIF will face near-term revenue stress that is
particularly severe,” the S&P analysts wrote. They found the
securitization can withstand a 43% decline in collections before experiencing
an interest shortfall in the next several months. That’s a high hurdle, to
be sure, but hardly impossible.
total restaurants to 796 in March from 894 three years earlier. In mid-May, the
rating agency downgraded the chain’s 2017 notes to B+, four steps below
investment grade, and said there’s a 50-50 chance it would drop it even
further. “Though the pandemic has placed significant stress on the restaurant
industry broadly, we believe TGIF will face near-term revenue stress that is
particularly severe,” the S&P analysts wrote. They found the
securitization can withstand a 43% decline in collections before experiencing
an interest shortfall in the next several months. That’s a high hurdle, to
be sure, but hardly impossible.
Focus Brands, the
parent of popular mall chains like Auntie Anne’s, Cinnabon and Jamba, is also
having a rough time. Its whole-business securitization from 2017 traded at
about 93 cents on the dollar last week, implying a yield of 12% (its
expected maturity is April 2021). Kroll Bond Rating Agency has said it might downgrade
the transaction, along with others that combined have a $3.1 billion
outstanding balance.
parent of popular mall chains like Auntie Anne’s, Cinnabon and Jamba, is also
having a rough time. Its whole-business securitization from 2017 traded at
about 93 cents on the dollar last week, implying a yield of 12% (its
expected maturity is April 2021). Kroll Bond Rating Agency has said it might downgrade
the transaction, along with others that combined have a $3.1 billion
outstanding balance.
Planet Fitness’s
whole-business securitization, which helped Guggenheim Securities win
GlobalCapital’s 2019 best securitization bank of the year award, sunk to as low
as 64 cents on the dollar in April, down from 103 cents previously. One of its
gyms in West Virginia may have exposed more than 200 people to Covid-19,
according to reports Monday. The company said the gym was closed “for an
additional deep cleaning by a third party” but would quickly open again.
Whether customers return just as swiftly is an open question.
whole-business securitization, which helped Guggenheim Securities win
GlobalCapital’s 2019 best securitization bank of the year award, sunk to as low
as 64 cents on the dollar in April, down from 103 cents previously. One of its
gyms in West Virginia may have exposed more than 200 people to Covid-19,
according to reports Monday. The company said the gym was closed “for an
additional deep cleaning by a third party” but would quickly open again.
Whether customers return just as swiftly is an open question.
If there’s one company to watch, though, it just might be Massage Envy. The private-equity-backed
spa chain, which had more than 1,000 locations when it issued its
whole-business securitization, was always something of an outlier, given a
60-minute wellness massage or healthy skin facial costs about $50 for members.
That’s a different price point than Domino’s, Five Guys or Taco Bell. The price
of its securitization fell to 73 cents on the dollar in May. Now at 82 cents,
that’s still equivalent to a yield of more than 12%, a level in the
corporate-bond market that would indicate distress.
spa chain, which had more than 1,000 locations when it issued its
whole-business securitization, was always something of an outlier, given a
60-minute wellness massage or healthy skin facial costs about $50 for members.
That’s a different price point than Domino’s, Five Guys or Taco Bell. The price
of its securitization fell to 73 cents on the dollar in May. Now at 82 cents,
that’s still equivalent to a yield of more than 12%, a level in the
corporate-bond market that would indicate distress.
It’s still quite likely that investors end up unimpaired,
even in these struggling bonds. But this is certainly not what they thought
they were signing up for, with plenty of competing forces now muddling the outlook.
Anecdotally, I’ve made buffalo wings twice during lockdown that I’d consider
better than TGI Friday’s and generally feel more adept in the kitchen than
ever. I suspect others feel similarly. All else equal, how many people will
want to venture out to support a dine-in chain over a small business, given all
the painful stories about their struggles to make ends meet? Who exactly is
eager to stroll around a shopping mall, let alone get their hands messy with a
Cinnabon or Auntie Anne’s pretzel?
even in these struggling bonds. But this is certainly not what they thought
they were signing up for, with plenty of competing forces now muddling the outlook.
Anecdotally, I’ve made buffalo wings twice during lockdown that I’d consider
better than TGI Friday’s and generally feel more adept in the kitchen than
ever. I suspect others feel similarly. All else equal, how many people will
want to venture out to support a dine-in chain over a small business, given all
the painful stories about their struggles to make ends meet? Who exactly is
eager to stroll around a shopping mall, let alone get their hands messy with a
Cinnabon or Auntie Anne’s pretzel?
I try not to get too committed to any one post-coronavirus
future, but at least within the whole-business securitization market, a clear
dichotomy is starting to emerge that roughly aligns with common-sense
expectations. If a chain delivers food to customers in the comfort of their own
home or car, it’ll be fine. If it’s a ubiquitous dine-in establishment, it’s a
more dicey proposition. If it’s a gym that offered free at-home classes during
lockdowns, people might very well just keep doing that, or make a one-time
splurge on their own equipment. And it could be a while before customers feel
truly relaxed when getting a massage or facial.
future, but at least within the whole-business securitization market, a clear
dichotomy is starting to emerge that roughly aligns with common-sense
expectations. If a chain delivers food to customers in the comfort of their own
home or car, it’ll be fine. If it’s a ubiquitous dine-in establishment, it’s a
more dicey proposition. If it’s a gym that offered free at-home classes during
lockdowns, people might very well just keep doing that, or make a one-time
splurge on their own equipment. And it could be a while before customers feel
truly relaxed when getting a massage or facial.
That’s what this niche market is saying, at least. If
investors think that assessment is out of whack, some huge yields beckon.
investors think that assessment is out of whack, some huge yields beckon.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Brian Chappatta at bchappatta1@bloomberg.net
To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net
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