From Fast Food to Fitness: The Rise of Whole Business Securitizations (WBS)

The emerging WBS market is gaining popularity with issuers, as it can offer them lower-cost borrowing. In turn, the market may offer opportunities for investors because the securities are collateralized by sticky cash-flow streams based on stable royalty income.

Key Takeaways

  • Unlike asset-backed securities, bonds issued through whole-business securitizations can include royalty and cash-flow streams.
  • WBS are collateralized by significant and sticky cash-flow streams and often pay a premium yield relative to similarly rated corporate bonds.
  • In today’s challenging economic environment, we think the restaurant sector is attractive within WBS, as the U.S. consumer is one of the strongest sectors in today’s weaker economy.

Against a backdrop of slowing growth and falling bond yields, a little-known yet rapidly growing market is gaining momentum among fixed income investors and issuers alike.

Whole-business securitization, or WBS, is a practice companies can use to issue bonds backed by many of its revenue streams. WBS is an alternative to issuing traditional corporate bonds, which would most likely not have investment-grade ratings.

The bonds issued via WBS are similar to asset-backed securities (ABS), but their collateral, which includes royalty and cash-flow streams as well as company assets, is more diverse. WBS are increasingly popular with companies that can borrow against revenue streams and other assets, albeit with more restrictive covenant structures, thereby achieving a higher credit rating on the loan, and thus cheaper financing.

Typical issuers include corporate franchises such as restaurant chains, where well-known brand names like Domino’s, Dunkin’ Donuts, Sonic and Wendy’s have all come to the market recently. Other examples include companies that have demonstrable, stable income such as music royalties, drug royalties, film libraries, clothing brand licenses and even gym chains such as Planet Fitness. As the market grows, revenue from patents, trademarks and the wide range of sources in the copyright world are likely to follow.

WBS have attracted interest from investors due to  the bonds’ sticky cash-flow streams and the size of the issues, which are typically larger than in the ABS market. The unique structures of WBS are another source of appeal: They often contain attractive enhancements or restrictions, such as prohibitions against subordinating the debt relative to other debt, or simply greater seniority and thus a higher priority for repayment.

WBS often pay a premium yield relative to similarly rated corporate bonds due to the relative newness of the market, the securities’ structural complexity and their hybrid nature between structured and corporate credit. The market also has fewer active investors, in part because it can require a cross-sector approach to research; for example, the analysis of a fast-food WBS draws on both corporate credit and structured-credit expertise as well as fundamental analysis of the issuing companies. As such, prospective buyers should be prepared to invest more time analyzing the company, industry and legal structure of the debt and ensure they understand the potential risks.

In today’s more challenging economic environment, we think the restaurant industry – particularly fast-food companies – is attractive within WBS, as fast-food revenue is typically a less-cyclical sector of the economy. Additionally, with consumer spending remaining strong, restaurants seem well positioned to generate relatively robust revenue growth even as other sectors of the economy are cooling.