Who knew David Bowie could influence the restaurant industry so greatly?
It was not his iconic music or sense of fashion that has inspired some of the largest companies in foodservice, however. It was his choice of financing.
Asset-backed “Bowie Bonds,” as the financial tools are known, first were structured in the late 1990s to allow the rock star to borrow against the value of his future music royalty revenues. Today, some of the industry’s largest debt recapitalizations are being similarly structured based on the securitization of intellectual property and future revenues.
IHOP Corp. is planning to use its asset-backed securitization, and the pending securitization of Applebee’s International Inc., to purchase the casual-dining giant. Dunkin’ Brands used its borrowings to repay the debt taken on by its private-equity purchasers. Domino’s Pizza Inc. used its debt facility to pay out a special dividend to shareholders and to fund additional share repurchases.
Asset-backed securitizations are not new, as borrowing against a company’s assets, such as real estate holdings, mortgages or even equipment, has always been done. But using as collateral a company’s trademark and the promise of future royalty streams is a different sort of beast that only larger, well-established concepts can pull off, sources said.
“What’s unique is that it allows companies to realize the value of [their] intellectual property assets and use [them] as primary collateral,” said Richard Rudder, partner in the law firm Baker & McKenzie LLP. “And typically, as the notes that are issued are rated [by debt-rating agencies], that allows a company to borrow at much more favorable rates.”
All of the restaurant companies that have undertaken asset-backed securitizations lately have cited the low cost of debt as a major benefit.
Rudder, based in Baker & McKenzie’s New York office, has structured some of the first royalty- and intellectual-property-based securitizations, starting with Bowie’s deal and moving into retail and fashion deals for companies like The Athlete’s Foot and Bill Blass, which used the company’s own securitization to help pay for a management-led buyout in 1999.
Robert D’Loren, president and chief executive of NexCen Brands Inc., which recently acquired the MaggieMoo’s and Marble Slab premium ice cream brands, also is known as a pioneer in the intellectual property and securitization finance arena. His brand portfolio now includes The Athlete’s Foot and Bill Blass.
Rudder sees a securitized debt structure almost custom-built for large franchised operations, and he predicts that the restaurant industry will see more transactions of this nature as both awareness of them and bankers’ comfort levels with them increase.
“The music deals and apparel deals were smaller,” Rudder said. “They didn’t get major investment banks involved in the smaller deals because the bankers can’t make money.
“But when the first deal gets done, it gets attention. In the restaurant industry, and fast food in particular, some companies went for it, and then investment bankers all follow suit.”
Currently, Lehman Brothers seems to have a lock on the restaurant space, having acted as sole structuring adviser for the Dunkin’ and Domino’s transactions, both of which were valued at more than $1 billion. Lehman Brothers also advised IHOP on its $200 million recapitalization, and plans to act as sole structuring adviser to the IHOP-Applebee’s securitization. Sonic Corp. also used Lehman Brothers’ services to structure its $600 million asset-backed securitization late last year.
Arby’s parent, Triarc Cos. Inc., structured a royalty- and trademark-based securitization in 2000, raising $290 million in perhaps the first such deal in the industry. The deal allowed Triarc to offer notes with triple-A-ratings—the highest for bonds, meaning they are highly unlikely to default—that perhaps it would not have been able to offer through standard bank or bond structures.
“It’s a way of financing that helps a company that might be weaker and couldn’t have borrowed at a certain level because its credit is too weak,” Rudder explained.
The notes can receive high ratings because of the collateral against a brand’s trademark, intellectual property and systemwide royalty revenues, unlike the asset-backed securitizations for franchisees that were in vogue in the 1990s and were based on a restaurant’s future sales, real estate and equipment. Those loans became so popular that numerous lenders entered the market, leading to some “less than scrupulous originators,” Rudder said. Many of those franchisee loans entered into default.
Thomas Conforti, IHOP’s chief financial officer, said his company’s recapitalization allowed it to obtain “very low-cost debt” that was highly rated because of the guaranteed structure.
“We can borrow cheaply, it allows for more flexibility, and as you can tell with our plans for Applebee’s, you can borrow a great deal of money against it,” Conforti said, referring to the $2.1 billion price tag of the pending Applebee’s buyout. “We get triple-A-rated paper. Us. Little IHOP can get this.”
Closing an asset-backed securitization isn’t easy, however, as it requires the legal restructuring of a company so that assets can be guaranteed, Conforti said. “Bankruptcy remote” entities, which in many restaurant industry cases are affiliated franchisees, are set up to assume ownership of a company’s assets and cash flows. That allows investors to take on the credit risks of the asset without taking on the corporate credit risks of the parent company.
“An issue with securitization is that, unlike a simple bank deal or bond offering, here you have a bunch of lawyers that restructure the company legally to claim it is bankruptcy protected,” Conforti said. “You offset the lower interest rates with paying lawyers and bankers a lot of money.”
