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U.S. Whole Business Securitizations Under Stress From COVID-19


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U.S. Whole Business Securitizations Under Stress From COVID-19

S&P Global Ratings expects the COVID-19 pandemic to result in a material negative sales impact for many U.S. whole business securitization (WBS) issuers. The global response to the virus has included mandatory business closures, reductions in maximum permitted occupancies, and encouraged social distancing. That said, it is difficult at this time to quantify the full impact on WBS transactions, not only because most issuers have not yet released quarterly sales figures reflecting the pandemic impact, but also because mandatory and voluntary restrictions on social congregation and the operation of noncritical businesses continue to be expanded and implemented in real time.

Nevertheless, we are assessing which WBS issuers are most vulnerable to lost sales and how long such losses may last. As we develop better clarity on the expected size and duration of reductions in transactions' securitized net cash flows, we will evaluate whether adjustments to our base-case and downside projections are appropriate. Changes in these projections could have an impact on our debt service coverage (DSCR) estimates, which, in turn, could affect ratings on WBS notes. Negative revisions to issuers' business risk profile scores could also result in rating changes.

While there continues to be a high degree of uncertainty about the rate of spread and timing of the peak of the coronavirus outbreak, epidemiological modeling suggests a pinnacle around June 2020--which we've used in assessing economic and credit implications. Either way, the COVID-19 pandemic has likely pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now" and "COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure," March 17, 2020). As the situation evolves, we will update our assumptions and estimates accordingly.

Risk Factors For WBS Issuers Across Sectors

Though it is too early to measure the impact of COVID-19 on transaction cash flows, we would like to highlight the risk factors we are considering across all WBS sectors.

The financial resilience of operators

As most WBS businesses are franchised, we'll be considering the ability of both franchisees and WBS sponsors to withstand significant sales disruptions at franchised and company-owned stores, respectively. Highly leveraged franchisees and franchisees in the lower quantiles of their respective system's performance distributions may find it challenging to continue operating certain units through the stress of the current environment. Sponsors with stronger liquidity positions, on the other hand, may be in a position to provide varying degrees of financial accommodation to struggling franchisees.

Diversification across geography

The rate of infection and degree of government-imposed restrictions on the operation of businesses and movement and congregation of people varies widely by region. Though certain sectors and operators may prove more resilient than others due to additional factors (described below), operators with a higher percentage of cash flows generated from more challenged regions will likely experience more stress. Furthermore, some operators have greater exposure to leisure travel destinations, which will almost certainly remain under stress for the duration of the pandemic, or business districts where sales may be lost due to widespread corporate adoption of work-from-home practices.

Restaurant Sector Risks

The majority of S&P Global Ratings' outstanding WBS ratings are on notes backed primarily by franchised restaurant royalties and other related cash flows. Restaurants are particularly vulnerable to near-term sales reduction due to mandatory restrictions on dine-in business in certain regions, as well as voluntary social distancing by consumers. Furthermore, restaurants may additionally struggle with operational challenges, such as labor disruptions if workers choose to stay home, and lower spending by consumers due to broader macroeconomic stress.

Restaurant-specific risk factors we are focused on include the following.

Dine-in/off-premise order mix

Restaurants with substantial dine-in sales will feel the greatest impact, in our view. Third-party delivery provider GrubHub reported on March 13th that it expects dine-in traffic for restaurants to decline by as much as 75% over the next few weeks. Meanwhile, Google has reported a year-over-year diner decline rate of more than 40% for the March 1-March 15 period. Certain states and cities are temporarily prohibiting dine-in sales, while others are reducing the maximum permitted restaurant occupancy. In addition, certain issuers, including Dunkin' Brands, Sonic, Taco Bell, Arby's, and Jack in the Box have recently announced the voluntary cessation of dine-in service across the U.S. (though they will continue to offer carry-out, drive through, and delivery offerings). Even where dine-in business is not being limited by mandatory or voluntary measures, consumer aversion to dining in close proximity to other patrons will add incremental stress to concepts reliant on dine-in sales. In addition, the casual dining segment, which is largely dine-in focused, has already exhibited weakness over recent years; reduced traffic, even for a short period of time, will further affect revenues.

Delivery as a potential mitigant to in-store sales losses

Delivery and drive-through options provide more of the prescribed social distancing than traditional on-premises dining, with reduced exposure in terms of human interaction and duration. Some cities and states that are temporarily prohibiting dine-in business are only permitting delivery sales. For this reason, we see restaurants with demonstrated reliance on delivery and drive-through operations as being better positioned.

Operational risk management

The safety of food, workers, and customers is always paramount, and particularly so during a pandemic. Safety-related concerns that will likely affect operators' bottom lines include an increased need for sick-pay coverage, the deep-cleaning of facilities, and incremental food-safety precautions.

Location type

Certain restaurants have significant exposure to transportation hubs, such as airports and train stations, enclosed malls, universities, conference centers, arenas, amusement parks, and other people-dense locations that are likely to experience steep traffic declines and outright closures over the course of the pandemic.

Non-restaurant WBS Risks

Fitness clubs

Of the non-restaurant WBS issuers, we believe fitness club operators may also be vulnerable to the same factors facing restaurants, including mandatory and voluntary closures. Though the pandemic may not spur significant membership cancelations for budget-priced clubs, such as Planet Fitness (Planet), where low monthly dues are auto-debited from customers' bank accounts, we do not yet know how national chains will be treating members' payment obligation in the event of gym closures. It is possible they will waive or refund dues for closed clubs or allow temporary membership freezes. On the operational front, we expect fitness club operators to focus on high-profile sanitization efforts, similar to those of restaurant operators, in an effort to safeguard employees and customers.

Automotive services

We believe that the pandemic's impact on automotive service providers, such as Driven Brands, may be less pronounced than that for other WBS sectors. We generally consider automotive services to be nondiscretionary in nature and thereby view them to be more resilient to economic slowdown then other business sectors. Additionally, while restaurants and other nonessential businesses have ceased operations, either voluntarily or under mandate, it is possible that automotive services will be deemed essential and could be exempt from mandatory closures. Although it is possible that the pandemic will result in decreased vehicle use (and therefore decreased wear and tear on personal vehicles), it is also possible that consumers may replace air and train travel with driving, increasing the need for personal vehicle maintenance. As such, we believe that issuers with exposure to the automotive industry will be better poised to weather the COVID 19 pandemic than their peers in the restaurant and personal fitness sectors.

Remediation/reconstruction services

Service providers like Servpro have the potential to benefit modestly from the virus due to increased demand for deep-cleaning services, though it is unclear whether the kind of sanitization typically required by outbreaks requires more than the application of typical household cleaning products. As with Driven Brands, we believe Servpro's services are generally nondiscretionary, and are likely to be far less affected by the pandemic than those of other sectors.

WBS' Structural Resilience

Though we cannot yet say what the ratings impact of weakened short-term cash flow collections may be, we can highlight the permanent all-in cash flow reduction that we believe each transaction can withstand before the receipt of timely interest or ultimate principal would be impaired (see table below). The table also depicts the exposure of the transactions to states that have experienced the most elevated levels of COVID-19 infections (or those that have mandated that restaurants cease dine-in service).

Whole Business Securitization Key Metrics And Peer Comparisons(i)
Brands Most recently issued series Rating(ii) Store count (no.) AUV (mil. $) Franchised (%) (iii) International (%)(iii) Concept type
Sonic 2020-1 BBB (sf) 3,583 1.3 94 0 QSR
Jersey Mike's 2019-1 BBB (sf) 1,615 0.8 99 0.3 QSR
Planet Fitness 2019-1 BBB (sf) 1,899 2.1 96 2.7 Fitness
Domino's 2019-1 BBB+ (sf) 16,528 0.9 98 64 QSR
SERVPRO 2019-1 BBB- (sf) 1,719 1.5 100 0 Remediation/reconstruction
Wendy's 2019-1 BBB (sf) 6,710 1.6 95 8 QSR
Driven Brands 2019-2 BBB- (sf) 2,702 1.3 86 15 Automotive services
Jack in the Box 2019-1 BBB (sf) 2,240 1.5 94 0 QSR
Applebee's/IHOP 2019-1 BBB (sf) 3,652 2.2 98 7 Casual dining
Dunkin' Brands 2019-1 BBB (sf) 20,912 0.8 100 43 QSR
Taco Bell 2018-1 BBB (sf) 6,505 1.6 91 6 QSR
Focus Brands 2018-1 BBB (sf) 6,191 0.3-1.7 98 22 QSR, casual dining, coffee, etc.
Hardee's/Carl's Jr. 2018-1 BBB (sf) 3,873 1.2 96 22 QSR
Jimmy John's 2017-1 BBB (sf) 2,690 0.8 98 0 QSR
Cajun Global 2017-1 BBB- (sf) 1,588 0.7 85 32 QSR
Five Guys 2017-1 BBB- (sf) 1,437 1.2 69 5 QSR
TGIF 2017-1 BB+(sf) 903 2.7 94 48 Casual dining
Arby's 2015-1 BBB-(sf) 3,335 1 72 1 QSR
Leverage (total debt/adj. EBITDA) (x) Min. base-case DSCR (x) Min. downside DSCR (x) 50% cash trap DSCR trigger (x) 100% cash trap DSCR trigger (x) Rapid amortization DSCR trigger (x) Break-even permanent cash flow reduction (%) % of annualized sales from high-risk states(iv)
Sonic 5.9 1.7 1.6 N/A 1.5 1.2 55 6
Jersey Mike's 6.4 2.2 1.7 1.75 1.5 1.2 65 37
Planet Fitness 6.5 1.7 1.3 1.75 1.5 1.2 50 37
Domino's 5.9 1.8 1.4 1.75 1.5 1.2 53 27
SERVPRO 7.1 1.7 1.3 1.75 N/A 1.2 51 32
Wendy's 6.6 1.7 1.4 1.75 1.5 1.2 53 27
Driven Brands 6.8 1.5 1.3 1.75 1.5 1.2 47 34
Jack in the Box 4.9 1.9 1.6 1.75 1.5 1.2 54 56
Applebee's/IHOP 6.0 1.7 1.4 1.75 N/A 1.2 54 31
Dunkin' Brands 6.2 1.6 1.4 1.75 1.5 1.2 55 43
Taco Bell 5.3 1.6 1.5 1.75 1.5 1.2 49 29
Focus Brands 5.8 1.6 1.5 1.75 1.5 1.2 49 27
Hardee's/Carl's Jr. 6.1 1.9 1.6 1.75 1.5 1.2 46 32
Jimmy John's 5.2 1.8 1.7 1.75 1.5 1.2 59 22
Cajun Global 5.2 1.8 1.4 1.75 1.5 1.2 47 10
Five Guys 6.7 1.6 1.5 1.75 1.5 1.2 57 28
TGIF 5.6 1.6 1.3 1.75 1.5 1.2 48 35
Arby's 5.3 1.6 1.2 1.75 1.5 1.2 41 22
(i)All numbers are as of each series’ closing date unless otherwise noted. (ii)S&P Global Ratings' credit rating for the senior-most securitization notes issued. (iii)% of total store count. (iv)States with high levels of Covid-19 infections or those that have ceased dine-in restaurant service. As of the date of this publication, these include California, New York, Washington, Illinois, Ohio, N.J., and Connecticut. Jersey Mike’s--Jersey Mike’s Funding LLC Planet Fitness--Planet Fitness Master Issuer LLC. Domino's--Domino's Pizza Master Issuer LLC. ServPro--ServPro Master Issuer LLC. Wendy's--Wendy's Funding LLC. Driven Brands--Driven Brands Funding LLC (Maaco, Meineke, and others). Jack in the Box Funding LLC (Jack in the Box). Applebee's/IHOP--Applebee's Funding LLC/IHOP Funding LLC (Dine Brands Global). Dunkin' Brands--DB Master Finance LLC (AUV represents domestic for both brands, leverage assumes no VFN). Taco Bell--Taco Bell Funding LLC. Focus Brands--Focus Brands Funding LLC (Carvel, Cinnabon, Auntie Anne's, and others). Hardee's/Carl's Jr.--Hardee's Funding LLC/Carl's Jr. Funding LLC. Sonic--Sonic Capital LLC. Jimmy John's--Jimmy John's Funding LLC. Cajun Global--Cajun Global LLC (Church's Chicken). Five Guys--Five Guys Funding LLC. TGIF--TGIF Funding LLC. Arby’s—Arby’s Funding LLC. AUV--Average unit volume. DSCR--Debt service coverage ratio. QSR--Quick-service restaurants. VFN--Variable funding note.

We emphasize that the break-even cash flow reductions we've solved for represent permanent reductions for the life of the transaction. In contrast, we believe COVID-19 related cash flow reductions will be temporary, though the expected duration is not yet clear. While it is possible that near-term stress may result in ratings migration, we don't currently believe transactions will face interest shortfalls or principal loss. We also note that the break-evens are solved for as of each transaction's closing date; break-evens based on the most recent system information may deviate slightly.

Should cash flow collections drop significantly, the transactions have several structural features in common to protect noteholders. The first is an interest coverage reserve account, typically sized to cover three months of accrued interest. The second is a set of triggers designed to trap cash in the deal if debt service coverage drops below certain specified levels. (These trigger levels are shown in the table above). The most recent average quarterly DSCR across our rated U.S. WBS issuers is approximately 3.6x.

As S&P Global Ratings receives more issuer-specific and industry-level data, and learns more about what actions issuers will be taking to mitigate sales losses, we will assess our rated WBS transactions' strength to determine whether rating reviews are warranted. We will continue to monitor the transactions closely and provide additional transparency on our outlook as we receive further information.

Related Research

  • COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020
  • COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
  • Global Credit Conditions: COVID-19’s Darkening Shadow, March 3, 2020

This report does not constitute a rating action.

Primary Credit Analysts:Jesse R Sable, CFA, New York (1) 212-438-6719;
Belinda Ghetti, New York (1) 212-438-1595;
Christine Dalton, New York (1) 212-438-1136;
Elizabeth T Fitzpatrick, New York (1) 212-438-2686;
Secondary Contacts:Craig J Nelson, New York + 1 (212) 438 8124;
Mariana Gurevich, New York + 1 (212) 438 2156;

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