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Hooters’ Problems Pose a Test for Securitizations
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Hooters’ Problems Pose a Test for Securitizations
Scott Carpenter, Immanual John Milton and Eliza Ronalds-Hannon
7 min read
(Bloomberg) -- A form of Wall Street financial engineering that’s become popular with chain restaurants is about to get a serious stress test, as Hooters heads toward bankruptcy and TGI Friday’s remains mired in one.
Whole-business securitizations took off over a decade ago, allowing retail chains to raise money more cheaply than in junk bond markets by promising future cashflow from their franchised restaurants and stores. There are now about $36 billion of the bonds outstanding, according to JPMorgan Chase & Co.
The bonds drew investors because of their apparent safety. Backed by most of a parent company’s assets and cashflow, they are, in theory, relatively well protected even if the company runs into serious trouble. Most earn investment-grade ratings that are five to six notches higher than similar corporate deals, according to a 2019 report from S&P Global Ratings.
Now, big problems faced by some companies that borrowed money through these securitizations are putting those assumptions to the test. While investors aren’t offloading the bonds en masse and most of the debt is still performing well, risk premiums on the securities have widened a few basis points this year even as spreads on other asset-backed assets have generally narrowed.
Hooters of America, the restaurant franchise known for its servers’ skimpy uniforms, raised $315 million in 2021 through the sale of whole business securitizations. But declining foot traffic has since caused liquidity issues for the company, and it’s now working with creditors on a plan to potentially restructure in bankruptcy, Bloomberg reported last month.
Investors that own Hooters’ securitized bonds are still getting regular interest payments, but they’re increasingly expecting that they will need to let Hooters repay their principal at a later date in order to avoid putting the company through a cash crunch that would jeopardize its ability to repay them completely, according to a person with knowledge of the matter.
If the hands of bondholders are forced, one reason may be because this debt fundamentally depends on the health of the company that issues it, unlike most securitized assets such as auto loans or mortgages.
And while treating a business like an asset-backed security can appeal to investors and restaurant owners in good times, that rigid framework can limit companies’ flexibility in tough times when they need it most, according to some investors familiar with the debt.
“One of the appeals of whole business is the rigidity of the structure and the contractual protections,” said Ben Hunsaker, a portfolio manager at Beach Point Capital Management. “But that’s also one of the flaws. You’re taking a living, breathing corporate entity and treating it like a hard asset.”
For example, the percentage of the franchise fees that the restaurant company uses for marketing may be hard coded into documents. If the company needed to renegotiate that percentage higher to try to boost sales, it may not have the flexibility to do so because it would be effectively depriving bondholders of funds. The firm might have to revise its business plans or find another workaround.
Hooters’ challenges are only the latest reminder that investors in whole business debt can still suffer when issuers wind up in trouble.
Casual dining chain TGI Friday’s filed for Chapter 11 in November, after which it became a “virtual certainty” that the company would default on the bonds backed by the company’s franchise fees and other assets, according to S&P.
And in 2023, bondholders reworked the terms of the WBS owed by Apollo-backed coin kiosk operator Coinstar to give the firm more breathing room to refinance maturing debt and cover expenses.
Compared with regular corporate bonds, selling whole business securitizations allowed restaurant owners to shave off as much as 50 to 100 basis points of interest, according to Tracy Chen, a portfolio manager at Brandywine Global. In the world of corporate money raising, that’s huge savings.
Investors are willing to buy them at slimmer interest rates and the bonds carry higher ratings than unsecured debt would, largely because of their protections. Those safeguards include asset isolation, post-bankruptcy cashflows, and the ability to appoint a back-up manager to take over the business if the parent company gets into trouble, S&P said.
Last year saw $12 billion of sales of the bonds, including a record-setting $3.35 billion offering by private equity firm Roark Capital to help pay for its buyout of sandwich chain Subway.
Week In Review
Companies sold more than $50 billion of US high-grade bonds in the week ended Feb. 28, about 70% more than dealers had forecast the week before. In the week ahead, dealers are bracing for a series of jumbo offerings, potentially including Mars Inc. to help finance its $36 billion purchase of snackmaker Kellanova, while Synopsys Inc. is looking to sell about $10 billion of bonds to support its $34 billion acquisition of software maker Ansys Inc.
US corporate bonds are seeing less price movement than Treasuries, making the securities in some sense safer than their government counterparts, an unusual turn of events that seems to be stoking high valuations for company debt.
Country Garden Holdings Co. is set to miss a self-imposed target date to reach a deal on its restructuring plan, as the defaulted Chinese builder struggles to gain support from creditors.
The US Securities and Exchange Commission expressed concerns over a much-anticipated private credit exchange-traded fund from Wall Street giants State Street Corp. and Apollo Global Management Inc., asking the firms for more information in a letter on Thursday.
Creditors to Altice International are gearing up for debt talks after another part of Patrick Drahi’s telecommunications empire agreed a solution for its liabilities this week.
JPMorgan Chase is dramatically ramping up its direct-lending effort, setting aside an additional $50 billion to capture a bigger chunk of the fast-growing market.
Chinese venture capital firm HongShan Capital Group is in talks with banks for an around $400 million loan to back its acquisition of electric guitar amplifier maker Marshall Group AB.
Senior executives at Assured Guaranty, one of the largest creditors to Thames Water, said they’re optimistic about the troubled UK utility after it won approval for emergency liquidity.
B. Riley Financial lined up new funding to replace Nomura Holdings Inc., erasing what’s left of a loan tied to an ill-fated buyout deal that has hobbled the brokerage and investment firm.
GPS Hospitality LLC, which operates networks of fast-food chains Burger King and Popeyes Louisiana Kitchen, is huddling with advisers about how to manage a shrinking cash pile amid revenue headwinds.
Clearlake Capital and Siris Capital-backed Newfold Digital is in discussions with some of its lenders to overhaul its debt, as the web-service provider faces weakening revenue and liquidity issues.
On the Move
Millennium Management hired former Goldman Sachs Group Inc. partner Tom Malafronte, the latest executive with ties to the Wall Street bank to make the move to Izzy Englander’s firm. Malafronte is joining Millennium as a senior portfolio manager focused on credit markets, after a short stint at LMR Partners, where he was head of US credit.
Eagle Point Credit Management is bringing in three ForeStar Credit veterans to build its infrastructure credit capabilities, namely Jennifer Powers to lead its infrastructure credit group, Brittany Pinkerton as the managing director, and Michael Weber as the unit’s director.
Eisler Capital hired Colin Teichholtz as global head of fixed income. Teichholtz, who’s based in New York, will join next month. He was most recently head of markets at Jeff Talpins’ Element Capital Management and left last year.
Bank of America Corp. managing director Jeff Fritsche has left the firm after an almost two-decade tenure. Fritsche worked in the firm’s leveraged-finance capital markets group.
Fortress Investment Group hired banking alumni Eric Hartman from Toronto-Dominion Bank and Bill Tefft from Bank of Montreal to join its private-credit origination group. They will focus on non-sponsored lending and report to Andy Frank, who heads private credit origination.
UBS named former Credit Suisse financing group veteran Kelly Jin as head of leveraged capital markets and structured solutions Asia, as the bank revamps its financing business following the 2023 takeover of Credit Suisse.
--With assistance from Reshmi Basu and Dan Wilchins.
