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October 15, 2018
Ira Schacter discusses whole-business securitization, a type of asset-backed debt structure that investors consider a safer bet than loaning money to a corporation as a whole.
Excerpts from "Franchisors and Others Jump on Whole-Business Securitizations," Agenda, October 15, 2018:
“I’m frequently struck by how this is new to CFOs, directors and management,” says Ira Schacter, a partner in the capital markets group at law firm Cadwalader, Wickersham & Taft. Cadwalader has shepherded several U.S. and European companies through these deals since helping Arby’s issue the first one in the United States in 1996. “Most boards are probably unaware of these, particularly at middle-market companies between $1 billion [and] $5 billion in value.”
[C]ompanies that could qualify garner higher credit ratings than those that merely have unsecured debt. Whole-business debt cannot be subordinated. Since that means that whole-business investors would get repaid first in the event of a default or bankruptcy, they’re more likely to be paid in full and therefore their investment is safer. In some cases, all of the excess cash flow from the vehicle goes to pay back the debt holders. The extra protection makes the vehicle less risky and therefore gives issuers the opportunity to offer it at lower rates. This format also leads to a step up in rating of two to four notches, Schacter explains.
Schacter says whole-business securitization provides a very different type of debt package than leveraged loans or high-yield bonds. They’re not only longer-term, but they generate more stable financing for the investor and a better rating for the issuer company.
“Every company is a little different. But I would say that when boards are thinking about financing or refinancing, ask banks that are approaching them what a securitization would look like. If banks [can’t] at least show them a securitization proposal, they’re not getting enough data and the company should be calling someone else.”
Franchise restaurant chains were an easy and acceptable first industry to use this concept for borrowing, claims Schacter. Franchisors hold strong contracts that typically call for getting back 4% of their local stores’ gross revenues. That’s pretty steady cash flow.
Even industrial businesses are gradually picking up on the idea. For instance, in May, Harley Marine became the first company to use hard assets to back a whole-business deal, according to Schacter. Harley transferred its fleet — 120 tugboats and 210 barges — into a sale-leaseback structure, then waded into the market with a private Rule 144A offering and brought back $455 million. By securitizing its cash flow and spot sales, the company will lower its funding costs.