The Whole Truth

Whole company securitization is helping non-investment-grade companies raise capital and recognize intangible assets on their balance sheets, but can it overcome its checkered past?

“Mid-market companies find [WCS] compelling,” says UCC’s D’Loren, “because they are often capital constrained” compared with Fortune 500 companies that can achieve the same cost of capital using many other financing options. D’Loren also maintains that companies might use WCS to provide liquidity for a change in business model, for growth through acquisition, or for a management buyout.

In November 2000, Triarc Cos. Inc. found WCS compelling enough to issue a 20-year, $290 million securitization backed by the franchise fees and trademark royalties from its U.S. and Canadian Arby’s fast-food restaurants. Triarc — in structuring the first major U.S. trademark deal since the Days Inn debacle — added a number of financial and legal enhancements. Ambac Assurance Corp. was brought in to guarantee the bonds, employing a reinsurance arrangement from Swiss Re New Markets; a debt-service reserve account trapped excess funds to provide short-term liquidity in case operating performance should drop; and as an incentive to the backup managers, their fees were predetermined.

Moody’s rated the Arby’s deal Aaa, primarily on the strength of the Ambac guarantee. At the time, O’Connor noted that the securitization would have been rated at least investment grade even without the Ambac backstop. S&P rated the deal AAA.

What really made the Triarc deal work, though, says Cadwalader’s Schacter, is that “Arby’s is a really old, tired brand with a loyal and stable customer base,” and it doesn’t rely on national advertising or growth for new customers, as do other Triarc properties.

What made Camacho’s deal work at The Athlete’s Foot Group, on the other hand, was the ability to recognize AF Group’s intangibles — “like finding hidden gems,” says the finance chief.

In August, Athlete’s Foot Marketing (one of the group’s companies) sold its trademark and more than 550 franchise fee contracts to a shell company called Athlete’s Foot Brands Inc. AF Brands issued 11-year notes, securitized by franchise fee revenues and trademark royalties. The bond issue, which Camacho says was in excess of $25 million, was rated Baa3 by Moody’s. AF Brands also hired about 25 AF Marketing employees to manage the assets.

Cheaper capital isn’t always the objective of whole company securitization, observes Camacho; in terms of interest rates, the capital that he extracts from this WCS deal costs about as much as the company’s inventory financing, “so it wasn’t the cheapest capital the world.” In fact, some bankers maintain that the upfront costs of securitizing the assets of an entire business line can be up to 10 times the cost of issuing corporate debt. However, since AF Group was able to replace short-term debt with a long-term bond, those initial costs are more than offset by the improvement in the weighted average of capital.

And those “hidden gems”? Camacho explains that, in a simple world, AF Marketing would have shown just cash and debt on the books at the completion of the securitization. However, because the company went through a management buyout four months later, goodwill accounting rules allowed for the value of the brand and franchise agreement to be recorded on the financial statements. “All of a sudden, my [AF Marketing] balance sheet goes from having no assets to over $50 million in assets,” avers the CFO. At press time, he was waiting for an independent valuation of the brand and franchise fees, which Camacho expects could climb to $65 million.

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