Innovation returns to whole biz ABS universe
Innovation and yield are returning to the franchise ABS sector as US market conditions improve, much to investors’ delight. Issuers beyond the typical restaurant franchises that dominate supply are eyeing entry into the securitization market, starting with home improvement companies.
The coronavirus pandemic stopped the growth streak in the franchise ABS market that began in 2019, when 13 deals totalling $9bn were priced. Last year the market more than halved by volume, as 10 deals brought supply of $4bn.
The sharp decline was inevitable, given stay-at-home edicts and social distancing measures, which caused casual dining same store sales to decrease 50%-60%. Some issuers that were hit especially hard saw declines of more than 75%, a securitization banker told GlobalCapital.
Meanwhile, unique non-restaurant structures like those of Primrose Funding and Massage Envy, which dominated the franchise ABS sector in 2019, disappeared completely. Five out of 13 deals in 2019 came from inaugural or recently new non-restaurant brands, but many would-be issuers found themselves locked out of the securitization market last year, as it closed its doors to less proven business models from first-time sponsors.
A year later, however, new names are expected to appear in the pipeline, thanks to warming market conditions.
“I think the sector in general is well bid now,” said an esoteric ABS market participant. “Even in situations where performance hasn’t been quite as strong, the ABS structures were able to validate themselves through the pandemic and investors remember that.”
Neighborly, a home repair and services franchise established in 1981, is the first example of a deal from a new sector this year. The company is preparing an $840m transaction backed by franchise agreements, royalties and other related fees. The deal is expected to be priced early next week.
“The roadshow just started [on Tuesday] but orders are already coming in and the book is starting to fill up quickly,” said a person familiar with the deal. “We’re particularly pleased by the high 3s on a yield basis for the seven year tranche.”
Kroll Bond Rating Agency assigned a BBB- rating to all three senior tranches — the ‘A-1’, ‘A-1-LR’ and ‘A-2’ notes.
Barclays is the sole structurer and bookrunner for the transaction.
The deal comes just three months after another home improvement company, ServiceMaster, priced a deal. Investors believed ServiceMaster 2020-1 would be a one-off, but Neighborly’s inaugural transaction proves otherwise, market participants said.
Neighborly’s offering is “emblematic” of a non-restaurant, non-discretionary credit where the name of the brand may not be as recognizable as, say, donut seller Dunkin', but receives investor attention for being a safe asset type.
Such non-discretionary credits include names like Driven Brands, an automobile repair center franchise. It is typical of the sort of businesses that can more or less continue to operate through recessions.
“There’s a lot to like about the Neighborly credit,” said the person familiar with the deal. "For one, it’s a portfolio with 24 different brands on five different segments. The company has been around for three crises — the tech bubble, the financial crisis of 2008 and the current pandemic.”
Through operating multiple brands, Neighborly is able to bring in a diverse customer base, said Kroll analysts in a pre-sale report.
Another reason why investors like Neighborly 2021-1 is the large size of the home services market, which is even bigger than the quick service restaurant market. The market is also highly fragmented, with only two other major competitors, Servpro and ServiceMaster, leaving a lot of room for Neighborly to grow.
'Encouraging' signs in secondary
Healthy WBS trading activity in the secondary market is also a compelling sign of recovery in the sector. Caroline Chen, senior vice-president and research analyst at Income Research + Management, said some of the tier one names in the sector are now beginning to trade too tight.
“After the pandemic, because of significant decline in same store sales numbers, [whole business ABS deals] were trading at a discount,” said Chen. “Now they are back to premium or par, which is a very encouraging sign.”
Along with Neighborly, there will be at least two more completely new entrants that will show up in the whole business ABS sector in 2021.
A “decent number” of refinancings are scheduled for this year as well, which will contribute to the overall issuance volume, according to a banker active in the sector.