Key Takeaways
- With a wave of corporate securitization debt maturing over the next few years, and an uncertain level of rates despite recent and projected Fed easing, S&P Global Ratings assessed the potential rating impact of hypothetical increases to refinancing rates for our portfolio of investment-grade, publicly-rated corporate securitization notes.
- Our analysis indicates that our ratings are mostly resilient to a potential increase in debt service costs.
- This scenario analysis does not include or imply any rating action.
Refinancing costs for North American corporate securitization issuers have risen over the past two years, and remain high relative to the current weighted average coupons of the notes issued by these master trusts. With a wave of corporate securitization debt maturing over the next few years, and an uncertain level of rates despite recent and projected Fed easing, S&P Global Ratings assessed the potential rating impact of hypothetical increases to refinancing rates for our portfolio of investment-grade, publicly-rated corporate securitization notes.
Scenario Description
While we forecast a slow easing of rates from their current levels over the next three years, given the comparatively low current weighted average debt costs for these master trusts, we conducted an analysis to gauge the impact of potentially higher rates across the portfolio. We tested three scenarios with a flat rate assumed for each--7%, 8%, and 9%--at the same debt quantum upon refinancing at the anticipated repayment date (ARD).
A significant amount (34%) of the $41 billion of publicly-rated corporate securitization bonds has an ARD in the next three years (see chart 1), so this study focuses on master trusts with securitization notes maturing over that period.
Chart 1
We assumed that notes with ARDs in 2025, 2026, and 2027 were refinanced today (using the most recent system data from second-quarter 2024 servicer reports) at their initial balance at fixed rates of 7%, 8%, and 9%, respectively. In addition, we assumed no principal payments until the notes reach their respective ARDs, at which point, we model their amortization in accordance with a criteria-based 15-year mortgage-style schedule. For comparability, we assumed all notes to be non-amortizing, although some are in fact currently amortizing at a standard rate of 1.00% per annum. We assumed an ARD of seven years for all of the notes.
Scenario Analysis Results
Overall, the impact was modest. Of the 16 investment-grade securitizations with approaching ARDs over the next three years, only seven saw a decline in debt service coverage that was large enough to result in a reduction of the base-case anchor. The base-case anchor is based on the business volatility score (BVS) and debt service coverage ratio (DSCR) and is a main factor in determining our rating on the securitization. Once the anchor is established, the rating is determined by adjusting the anchor for resiliency of the downside cash flows, modifiers, and a comparable rating analysis. (For a more detailed description of this cash flow analysis framework, see "Global Methodology and Assumptions For Corporate Securitizations," published June 22, 2017.) If these factors remained constant over time, the magnitude of change in the anchor would be equal to the change in the rating.
Our analysis indicates that our ratings are mostly resilient to a potential increase in debt service costs. Four systems' anchors were impacted by one notch, one was impacted between one and two notches, and two felt two-to-three notches of impact (see table 1). The two most impacted issuers were Arby's Funding LLC and DB Master Finance LLC.
Table 1
| Potential rating impact from a change in base-case anchor | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Scenarios | ||||||||||||||
| Transaction name | Current anchor | % of debt with ARD within three years | Weighted average coupon of debt with ARD within three years (%) | 7.00% | 8.00% | 9.00% | ||||||||
| Applebee's Funding LLC | bbb- | 50 | 4.72 | - | - | -1 notch | ||||||||
| Arby's Funding LLC | bbb- | 100 | 3.24 | -2 notch | -2 notch | -3 notch | ||||||||
| DB Master Finance LLC | bbb- | 40 | 3.66 | -2 notch | -2 notch | -2 notch | ||||||||
| Domino's Pizza Master Issuer LLC | bbb+ | 50 | 4.26 | -1 notch | -1 notch | -1 notch | ||||||||
| Driven Brands Funding, LLC | bbb- | 54 | 5.16 | - | - | - | ||||||||
| GoTo Foods Funding LLC | bbb- | 30 | 5.09 | - | - | - | ||||||||
| Hardee's Funding LLC | bbb- | 33 | 3.98 | - | - | - | ||||||||
| Jack in the Box Funding LLC | bbb- | 44 | 3.79 | - | - | - | ||||||||
| Jersey Mike's Funding LLC | bbb+ | 75 | 3.92 | -1 notch | -1 notch | -1 notch | ||||||||
| Jimmy John's Funding LLC | bbb- | 40 | 4.59 | -1 notch | -1 notch | -2 notch | ||||||||
| Planet Fitness Master Issuer LLC | bbb- | 19 | 3.25 | - | - | - | ||||||||
| SEB Funding LLC | bbb- | 49 | 4.97 | - | - | - | ||||||||
| SERVPRO Master Issuer LLC | bbb- | 32 | 3.88 | - | - | - | ||||||||
| Sonic Capital LLC | bb | 44 | 3.91 | -1 notch | -1 notch | -1 notch | ||||||||
| Taco Bell Funding LLC | bbb | 49 | 3.50 | - | - | - | ||||||||
| Wendy's Funding LLC | bbb- | 13 | 3.78 | - | - | - | ||||||||
| ARD--Anticipated repayment date. | ||||||||||||||
The main driver of the rating stability of the other nine systems is continued growth in top-line revenue, which outperformed our no-growth assumption made at initial issuance. As you can see in the chart below, system-wide sales (SWS) for all of the systems, except Applebee's Funding LLC, have grown by over 10% since 2019.
Chart 2
Refinancing risk varies
Systems display a varying degree of exposure to refinancing risk (see chart 3), based on the proportion of each master trust's debt stack that is maturing in the next three years. For example, Arby's Funding LLC has a high level of refinancing risk, as the $750 million of notes with an ARD in the next three years represents 100% of the debt stack. Conversely, less than 10% of Applebee's capital stack has an ARD in the next three years, so the higher refinance scenarios do not result in significant anchor reduction.
Chart 3
Refinancing risk is further driven by the level of the coupons that are assumed to be replaced when refinanced (chart 4). Using Arby's again as an example, its exposure is further increased by the very low current weighted average coupon on the debt being refinanced.
Chart 4
To combine these two factors, we looked at the weighted-average master trust coupon under each scenario. Chart 5 shows the current weighted average master trust rate, with incremental master trust rate when the maturing notes are refinanced at 7%, at 8%, and at 9%. Arby's has the greatest differential. While there are other factors--such as overall leverage and how tight the initial issuance structure was to the DSCR ranges used--we feel that these two factors are key contributors to the results of the hypothetical scenarios.
Chart 5
Scenario Analysis Limitations And Caveats
The following are limitations and caveats to our scenario analysis:
- The refinancing rate scenarios are purely hypothetical.
- These cash flow scenarios are designed strictly to assess the rating anchor impact on master trusts of refinancing a set of notes that are maturing over next three years. We are not addressing credit risk, operational risk, counterparty exposure, or legal considerations in this analysis.
- Any ratings impacts based on downside scenario, modifier analysis, and comparable ratings analysis were not part of this analysis. We will incorporate these additional considerations during our full review of these master trusts.
- The results are based primarily on the most recent performance data available for each issuer and the cash flow modeling assumptions we derived from these data.
- A rating committee applying the full breadth of S&P Global Ratings' criteria and including qualitative factors might, in certain instances, assign a rating that differs from the results of the largely quantitative analysis we undertook here.
Related Criteria
Related Research
- U.S. Corporate Securitization Newsletter, Oct. 11, 2024
- How The Next Slowdown Could Affect U.S. Corporate Securitizations, Aug. 16, 2023
- Credit FAQ: A Closer Look At The Management Fee In U.S. Corporate Securitizations, May 8, 2023
This report does not constitute a rating action.
| Analytical Contacts: | Christine Dalton, Englewood + 1 (212) 438 1136; christine.dalton@spglobal.com |
| John Lai, New York + 1 (212) 438 2208; john.lai@spglobal.com | |
| Deborah L Newman, New York + 1 (212) 438 4451; deborah.newman@spglobal.com | |
| Research Contributors: | Yojana Bhoir, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
| Ritika Kanchi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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