Rating Guidelines for Franchise Loan Securitizations
Fitch IBCA Energy Concept Tiers
Exxon Mobil Texaco Chevron Amoco Shell Conoco (DuPont) Arco Phillips/Phillips 66 Marathon (USX) Ashland Citgo Sunoco Gulf
Coastal Diamond/Ultramar Tosco Sun Amerada Hess Unocal FINA MAPCO Total Pennzoil Murphy’s Kerr McGee
Quaker Sinclair USA Petroleum Beacon Independent/Private Label
ers only, and should not exceed 10% of the principal amount outstanding of the total pool. All acquisition loans must be disclosed in writing, and the assump- tions for any pro forma FCCRs must be provided. To verify and calibrate the pro forma FCCR, Fitch IBCA will also require corroborating comparative store economic analysis for adjacent stores operated by the existing and cur- rent borrower and by comparable stores at adjacent locations.
Unit Seasoning Unit seasoning acts as a proxy for loca- tion viability and revenue sustainabil- ity. Initially, newly opened units tend to experience a pickup in traffic and store performance due to early promotions and novelty. Over time, the unit typi- cally experiences a tapering off of sales until it settles at a long-run equilibrium level for sales and average costs. In ad- dition, assuming stable demographics, well seasoned locations establish them- selves as destinations for consumers seeking a particular franchise’s product offerings and, thereby, experience less demand fluctuation and more stable traffic patterns. Units are expected to have been operating with the existing franchise for a minimum of 12–18 months to be included in the pool. Newer units included in the pool should be operated only by experi- enced borrowers with a large number of units under management.
Collateral Type Collateral type or seniority of claim is employed as a benchmark for assessing how much of the realized going concern value is expected to accrue to the loan under the most likely recovery sce- nario. Typically, franchise loan pools contain a mixture of fee-simple mort- gages, ground leases, or enterprise loans. Equipment loans or leases must be cross-defaulted and cross-collateral- ized with the fee-simple mortgages, ground lease, or space lease on the re- lated location, and both forms of financ- ing must be included in the pool.
Fitch IBCA prefers the terms of ground leases to extend beyond the legal ma- turity of the loans in the pool.
osyncratic risks inherent in each loan become more apparent, and further analysis and diligence may be required.
Loan to Value LTV in a cash flow-based franchise loan should be inversely proportional to unit FCCR. Since a franchise location is deemed to be a special purpose prop- erty, the best estimate of economic value is generally the going concern value. In evaluating LTV as a basis for estimating recoveries, Fitch IBCA will calibrate the LTV to the unit FCCR to verify the appropriate valuation meth- odology.
Multiple of Loss Analysis The LDRM credit factor analysis esti- mates expected default and recovery for the pool on a loan-by-loan basis. Fitch IBCA validates the resulting en- hancement levels by stressing ex- pected losses on the combined pool. This approach is more consistent with other areas of structured finance, apply- ing a fixed multiple to the total pool’s estimated base case net losses. Credit enhancement levels are estimated us- ing a gearing approach that assigns lev- els upward and downward from the ‘BB’ base case level. By comparing the output from this calculation at each rat- ing (stress) level to the output from the credit factor analysis, indications of idi-
FCCR Default Analysis Since one large obligor could poten- tially operate many strong franchise concepts, Fitch IBCA does not auto- matically default the largest obligors in the franchise loan pool. Rather, this analysis groups obligors into cohorts ac- cording to their consolidated FCCR and defaults the concentrations of obli- gors according to their FCCR level. By using this approach, Fitch IBCA weights the likelihood of default as a function of the ratio of free cash flow to fixed charges and, hence, demonstrates the pool’s susceptibility to a cash flow induced default.
The goal of the FCCR default analysis is to not unduly penalize the larger ob- ligors, which are often more diversified, more efficient, and lower cost operators simply because they are large. Fitch IBCA believes that in the event of de- fault, the borrowers with the best infra- structure, the strongest installed base, and the highest free cash flow should be expected to recover close to going concern value. In contrast, concentra- tions of smaller, low-FCCR loans should be examined more closely as they could cause the greatest exposure
Fitch IBCA, Inc.