Three Ratings On Arby#s Funding LLC Placed On CreditWatch Negative

Stocks and Financial Services Press Releases Thursday January 11, 2018 09:14
CHICAGO--11 Jan--S&P Global Ratings

CHICAGO (S&P Global Ratings) Jan. 10, 2018--S&P Global Ratings today placed its ratings on the class A-1, A-2, and 2016 A-1 notes from Arby's Funding LLC on CreditWatch with negative implications following Arby's announcement of plans to acquire the Buffalo Wild Wings (BWW) brand (see list).

Arby's plans to acquire BWW for $2.9 billion, which will be funded by a new $1.575 billion first-lien term loan B and $485 million senior unsecured notes outside of the current securitization, $890 million of common equity, and a $23 million incremental draw on Arby's securitization variable-funding notes (VFN).

In the U.S., most whole business securitizations (WBS) have been structured so that substantially all of the business' cash-generating assets are owned by the securitization, and the securitization debt raised to purchase those assets represents all of the business' debt--hence the "whole business" moniker. Because there are no debt obligations outside of the securitization, we can compare the cash flow generated by the assets owned by the securitization to the securitization debt payments alone.

When additional claims to the business are introduced outside of the securitization, the analytical framework shifts more towards our corporate credit rating approach, which considers how the business' assets or enterprise value may be allocated across different groups of creditors following an event of default on any of its existing obligations. Arby's acquisition plan for BWW moves our analytical approach in the direction of the corporate framework, making the case for significantly different rating outcomes between the corporate debt and the WBS debt weaker.

S&P Global Ratings' credit rating methodology for corporate securitizations (whole business securitizations) explicitly makes a negative adjustment to the business volatility score (BVS) when there are significant additional creditor groups and business segments outside of the securitization. After this downward adjustment is applied, the given WBS transaction must have stronger cash flow results to maintain a given rating level (i.e., without an improvement in cash flow coverage, the WBS rating will likely move towards the corporate rating, all else equal).

This adjustment has not been utilized in many WBS transactions to date (for reasons described above). In the Taco Bell Funding LLC securitization, we applied a two-category downward BVS adjustment given the magnitude of other creditors and assets at the Yum! Brands level that existed outside of the Taco Bell securitization. For Arby's Funding LLC, we would likely apply a similar downward BVS adjustment of two categories as part of the CreditWatch resolution process.

We understand that the proposed BWW acquisition will include a non-disturbance agreement for the benefit of the Arby's WBS creditors, which is meant to minimize any disruptions relating to claims that could arise from the new creditors outside of the securitization. While this agreement may ultimately prove effective, it comes with questions about contestability and enforceability that are unnecessary in most other WBS transactions, and in our view evidences a weaker credit profile that may come along with the post-acquisition structure. While we will likely lower the BVS by two categories, we will also likely increase it by one category, as the combined business will have an S&P Global Ratings business risk profile (BRP) of "fair," which is one category higher than Arby's current BRP. Arby's Funding LLC's current BVS is a 4, so the net change will likely result in a BVS of a 5 (one category lower).

The Arby's business has performed relatively well over the past several years from a systemwide and same store sales perspective, with consistent positive growth since 2011. At the same time, the company owned store % has increased, from approximately 30% at the time of the 2015 WBS issuance to nearly 32%. The resolution of these CreditWatch placements and any rating changes will take these factors into account when we analyze whether the forward-looking cash flows are strong enough to sustain the current rating level given the likely lower BVS.

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