will assign weightings to each credit factor in determining each loan’s rela- tive contribution to the pool.
Subordinated loans and second mort- gages are generally not permitted un- less the related senior loans are also in the same pool. In this situation, the senior loans will have absolute first pri- ority and the subordinated debt and/or second mortgages must be deeply sub- ordinated. The language for all subor- dinated debt in the securitization will also be verified. Multiple loans in the pool to an individual borrower or affili- ate must be cross-defaulted and cross- collateralized, with the loans to affiliates disclosed in writing. Debt service for subordinated loans and loans to related parties must be in- cluded in the FCCR calculation and also disclosed by the issuer.
Servicer Review As stated, the originator will generally act as servicer in the transaction, responsible for monitoring loan performance, track- ing collections and delinquencies, pursu- ing collections, reporting on pool performance, managing workout situ- ations, and advancingprincipal andinter- est. The role of servicer requires specialized industry knowledge and so- phisticated systems. Thus, many smaller originators may use third-party servicers with broader technical capabilities. Fitch IBCA performs a full due diligence on each servicer prior to rating a franchise loan transaction and will frequently re- quire that third-party servicers be rated by the CMBS group.
The servicer must have adequate sys- tems capabilities and staff expertise to track performance on a loan-by-loan ba- sis and to provide consolidated pool reports to the trustee and rating agen- cies. In addition, the servicer should have a sound procedure for pursuing delinquent accounts and working with borrowers to ensure timely payment.
Rating Guidelines for Franchise Loan Securitizations
Fitch IBCA will require historical pool data evidencing the servicer’s overall portfolio delinquency experience and any historical delinquency experience of loans in the pool.
tion of terms with the franchise owner. Since the franchisor will likely have a vested interest in maintaining the sub- ject location, it may provide support to the defaulting franchisee and could be a party to the workout plan.
Servicers are typically required to ad- vance both principal and interest to the amount deemed recoverable in the event that sufficient funds are not avail- able to make payments to bondholders. In the event of a servicer default or if the servicer is unable to advance, the trustee is required to advance principal and interest payments to the amount deemed recoverable.
In workout situations, the servicer or special servicer, depending on the transaction, will be responsible for de- termining the optimal source of repay- ment through coordination with the franchisor, the franchisee, and the bondholders. Default by a franchise borrower will not necessarily result in liquidation of the mortgaged property. Since franchise locations are consid- ered single-use properties, which have typically been chosen through sophisti- cated location analysis performed by the franchisor, the optimal workout so- lution will likely involve the renegotia-
In a liquidation scenario, a strong fran- chisor will be incented to support its brand name at the subject location and may assist in finding an alternate opera- tor to assume the defaulting operation. Barring assistance from the franchisor, such as in the case of independent or unbranded gasoline concepts, the mar- ket for franchise businesses is relatively liquid and the servicer should be able to find many potential purchasers for a strong franchise in a good location. However, this reinforces the need for strong initial credit standards by the originator and loan reunderwriting in the rating process. Weak loans will not
Key Qualitative Factors
Transaction Structure Originator Review Servicer Review Environmental Legal Issues
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