Rating Guidelines for Franchise Loan Securitizations
only be more likely to default but the subject locations will be fundamentally more difficult to place in the market.
Environmental Analysis For many businesses included in a fran- chise loan pool, environmental issues represent material risks. Environ- mental risk varies according to the in- dustry sector and, therefore, accepted practices for environmental due dili- gence may range from vista searches to Phase I and II investigations. Fitch IBCA assesses the environmental due diligence performed by the originator using a commercial mortgage standard to verify the level of environmental protection required in each industry. Generally, Phase I audits are required, but exceptions can be made where there is a high level of environmental diligence performed by the originator.
Legal Issues Fitch IBCA reviews all legal opinions related to the perfection of security in- terest by the originator/servicer and the assignment of that security interest to the trust. Fitch IBCA also requires that the security documents be recorded in the name of the trust.
The franchise agreement is the opera- tive document governing the brand af-
filiation between the franchisor and the franchisee. The franchise agreement sets the terms for royalty payments, advertising contributions, and the re- spective duties, representations, and warranties of the franchisor and the franchisee. Associated with and in sup- port of the brandname, logo, and trade- mark, the operating policies and procedures of the franchise agreement typicallyrepresent and enforcea uniform and consistent product quality and type, service standard, location or store con- figuration, and business format.
In many circumstances, the franchise agreement is further supplemented by an operating agreement. The operating agreement incorporates policies and pro- cedures manuals while the intercreditor agreement declares and specifies rights and responsibilities of franchisor and franchisee with respect to creditors for- mally recognized by the franchisor. The Uniform Franchise Offering Circular, the information memorandum legally required to be circulated by the fran- chisor, is the primary source of publicly available information on the franchisor.
Fitch IBCA requires that issuers dis- close in writing if there is a leasehold or franchise agreement that expires prior to the maturity of the loan without a
guaranteed renewal. Fitch IBCA will modify subordination levels accord- ingly to account for the risk of nonrene- wal. In single-obligor transactions, or where a single obligor constitutes greater than 40% of the principal amount outstanding of a pool, Fitch IBCA will review the terms and condi- tions of the intercreditor agreement (if one exists between the franchisor and franchisee) to see if the loan origina- tor/servicer has been declared a recog- nized creditor by the franchisor. Fitch IBCA will also review the terms and conditions of the intercreditor agree- ment, as well as the respective rights and duties of the franchisor, the fran- chisee, and the loan originator/servicer in the event of a default or the disposi- tion of the loan.
For further information on franchise loan securitizations, please refer to Fitch IBCA Research on “EMAC Owner Trust 1998-1,” dated Sept. 22, 1998, “FFCA Loan Receivables Trust 1998-1,” dated Sept. 24, 1998, and “FMAC Loan Receivables Trust 1997-B,” dated March 30, 1998. All these reports are available on Fitch IBCA’s web site at www.fitchibca.com.
Copyright © 1998 by Fitch IBCA, Inc., One State Street Plaza, N , NY 10004 Telephone: New York, 1-800-753-4824, (212) 908-0500, Fax (212) 480-4435; Chicago, IL, 1-800-483-4824, (312) 214-3434, Fax (312) 214-3110; London, 011 44 171 638 3800, Fax 011 44 171 374 0103; San Francisco, CA, 1-800-953-4824, (415) 732-5770, Fax (415) 732-5610 Barbara A. Besen, Publisher; John Forde, Editor-in-Chief; Madeline O’Connell, Director, Subscriber Services; Nicholas T. Tresniowski, Senior Managing Editor; DianeLupi,ManagingEditor;JenniferHicke ,AndrewSimpson,IgorZaslavsky,Editors;JayDavis, Martin E. Guzman,Paula M. Sirard, SeniorPublishing Specialists; Harvey Aronson, Publishing Specialist; Yvonne Y. Pak, Robert Rivadeneira, Publishing Assistants. Printed by American Direct Mail Co., Inc. N , NY 10014. Reproduction in whole or in part prohibited except by permission.
Fitch IBCA ratings are based on information obtained from issuers, other obligors, underwriters, their experts, and other sources Fitch IBCA believes to be reliable. Fitch IBCA does not audit or verify the truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result of changes in, or the unavailability of, information or for other reasons. Ratings are not a recommendation to bu , sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch IBCA receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from $1,000 to $750,000 per issue. In certain cases, Fitch IBCA will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from $10,000 to $1,500,000. The assignment, publication, or dissemination of a rating by Fitch IBCA shall not constitute a consent by Fitch IBCA to use its name as an expert in connection with any registration statement filed under the federal securities laws. Due to the relative efficiency of electronic publishing and distribution, Fitch IBCA Research may be available to electronic subscribers up to three days earlier than print subscribers.
Fitch IBCA, Inc.