Nine Ratings On Three Whole Business Securitizations Placed On Watch Negative Due To Stress From COVID-19

  • The coronavirus pandemic has caused the widespread temporary elimination of the dine-in sales channel for most restaurants and the temporary closure of fitness clubs nationwide.
  • Applebee's Funding LLC/IHOP Funding LLC and TGIF Funding LLC are exposed to substantial near-term cash flow declines because most of their revenues are generated from dine-in sales, which are now temporarily curtailed on a mandatory or voluntary basis nationwide.
  • Similarly, the temporary system-wide gym closures and the loss of membership dues from those closed gyms will significantly reduce available cash flow for Planet Fitness Master Issuer LLC's securitizations.
  • We are placing our ratings on notes issued by Applebee's Funding LLC/IHOP Funding LLC, TGIF Funding LLC, and Planet Fitness Master Issuer LLC on CreditWatch with negative implications. We will review the ratings over the next 90 days, focusing on the available near-term liquidity and long-term debt service coverage of each transaction in the context of our evolving view of the severity and duration of the COVID-19 driven stress.
NEW YORK (S&P Global Ratings) March 24, 2020--S&P Global Ratings today placed its ratings on nine classes from three whole business securitizations from Applebee's Funding LLC/IHOP Funding LLC (Applebee's Funding/IHOP Funding), TGIF Funding LLC (TGIF), and Planet Fitness Master Issuer LLC (Planet Fitness) on CreditWatch with negative implications (see list).
The rating actions are driven by the temporary widespread elimination of dine-in sales for the casual dining sector and the temporary system-wide unit closures for fitness clubs in the personal fitness sector due to the COVID-19 pandemic. We expect severe near-term sales declines for both sectors, driven primarily by mandated and voluntary closures of sales channels and unit closures.
Though the pandemic places significant stress on the restaurant and fitness industries broadly, we believe Applebee's Funding/IHOP Funding, TGIF, and Planet Fitness will face near-term revenue stress that is particularly severe. While other whole business concepts have the potential to mitigate revenue declines by relying on already well-diversified sales channels, these four concepts currently have greater challenges in this area, in our view. Applebee's Funding/IHOP Funding and TGIF rely primarily on dine-in foot traffic, which has been particularly stressed, given government mandates and voluntary initiatives to temporarily halt dine-in operations. Similarly, Planet Fitness, which operates approximately 2,000 fitness centers across the country, has announced the closure of all units system-wide and curtailment of dues collection for closed gyms. Both of these situations suggest a significant forthcoming decline in securitization revenue that will place significant stress on each transaction.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak in June or August, and we are using our assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now" and "COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, both published March 17, 2020), which could also negatively affect employment levels or housing markets. As the situation evolves, we will update our assumptions and estimates accordingly.
APPLEBEE'S FUNDING/IHOP FUNDING
We are placing our ratings on Applebee's Funding/IHOP Funding series 2019-1 notes on CreditWatch negative. The CreditWatch placement reflects our expectation for a significant decline in restaurant revenue for the Applebee's and International House of Pancakes (IHOP) concepts nationwide due to the mandatory and voluntary cessation of dine-in offerings and the possibility that it may take some time for dine-in traffic to return to pre-pandemic levels even after social-distancing guidelines are made less stringent.
Applebee's Funding/IHOP Funding series 2019-1 is a $1.525 billion corporate securitization of Dine Brands Global Inc.'s (Dine's) business, which currently comprises the operations of Applebee's and IHOP restaurants in all 50 states and 17 countries globally (though no international revenues are pledged to the transaction). The securitization is backed by domestic corporate and franchisee-owned restaurant royalties and fees, though additional securitization revenue comes from margins from products sold to franchisees and franchisee lease payments. Although Applebee's and IHOP restaurants differ in terms of their offerings and branding, both offer table-service of quality, moderately priced food and beverages. The brands have undertaken initiatives to increase their non-dine-in sales mix and there has been some jurisdictional flexibility to allow for delivery of alcohol. However, both concepts continue to rely primarily on dine-in traffic.
A significant portion of Dine's stores has temporarily stopped offering dine-in service due to voluntary restrictions and state and local mandates. While sales figures for the current quarter have yet to be released, we expect the impact of these restrictions to be significant. One mitigating factor is potential growth in off-premise sales, including delivery and take-away orders. Additionally, Dine's limited exposure to some of the major urban areas where COVID-19 infection rates are currently the highest, such as New York City and Seattle, suggests that it could be poised for a swifter return to full service if other regions reduce their restrictions sooner.
On March 19, 2020, Dine announced that it drew approximately $223 million of the $225 million available under its series 2019-1 variable funding notes (VFNs). We note that S&P Global Ratings' rating analysis already assumes VFNs to be fully drawn as of each transaction's closing date, as noted in our presales, so the draws are neutral from a rating standpoint. According to the company press release, this was done as a precautionary measure to increase the financial flexibility of the company going forward, stating that the proceeds may be used for general corporate purposes. Though the draw bolsters liquidity at the level of the securitization sponsor, it does not strengthen liquidity at the securitization level directly. Transaction-level liquidity exists in the form of an interest reserve account sized to three months of interest and any excess cash proceeds in structure.
We expect to resolve the CreditWatch placement as we learn more about the severity and duration of COVID-19's impact on Dine Brands as a whole, as well as the liquidity resources and cash flow stability of the Applebee's Funding/IHOP Funding series 2019 1 notes.
TGIF
We are placing our ratings on TGIF's series 2017-1 notes on CreditWatch negative. The CreditWatch placement reflects our expectation for a significant decline in restaurant revenue for domestic and international TGIF units, driven not only by mandatory and voluntary cessation of dine-in offerings, but also by our expectation that consumers may remain hesitant to dine out even after social-distancing guidelines are made less stringent.
TGIF's series 2017-1 is a $450 million corporate securitization of TGIF units in 39 U.S. states, Washington D.C., and 57 countries globally. The securitization is backed primarily by existing and future franchise agreements and related franchisee royalties and fees, royalties on existing and future company-owned restaurants, license revenue, and existing and future intellectual property.
TGIF concepts offers a casual-dining experience offering American cuisine, bar food, and alcoholic and nonalcoholic beverages. Although TGIF has undertaken initiatives to increase its non-dine-in sales mix and there has been some jurisdictional flexibility to allow for the delivery of alcohol, it continues to rely primarily on dine-in traffic, which represented more than 80% of store revenue as of March 2020.
TGIF has not yet mandated a system-wide closure of its units in response to COVID-19, but over 80% of its units have temporarily stopped offering dine-in service as a result of voluntary restrictions and state and local mandates. In addition, although sales figures for the most recent period have yet to be released, we expect the revenue declines to be severe, particularly for TGIF units located in urban areas and states in which COVID-19-related limitations on dining-in have been imposed. Near-term risks to the structure are mitigated by the structure's internal credit enhancement, which includes both the excess cash flow to the structure and an interest reserve account sized to three months of accrued interest. Increased off-premise sales has the potential to mitigate sales loss.
We expect to resolve the CreditWatch placement as we learn more about the severity and duration of COVID-19's impact on TGIF brands as a whole, as well as the liquidity and cash flow stability of TGIF's series 2017 1 notes.
PLANET FITNESS
We are placing our ratings on Planet Fitness's series 2018-1 and 2019-1 notes on CreditWatch negative. The CreditWatch placement reflects our expectation of a steep temporary decline in membership dues collections, the securitization's primary source of revenue. As of March 20, 2020, all company-owned Planet Fitness gyms throughout the U.S. were temporarily closed, with the recommendation that franchisee-owned units follow suit. The company has announced that membership dues, which are automatically billed and deducted from members' bank accounts, will be not be billed for gyms that remain closed. This represents a near total, though temporary, decline in securitization revenue for the affected months.
Planet Fitness' series 2018-1 and 2019-1 notes are corporate securitizations totaling $1.275 billion and $550 million, respectively. The notes are issued from the same master trust and are backed primarily by royalty revenue from franchisees. Additional securitized cash flow comes from corporate owned store profit and synthetic royalties, as well as the profit margin from fitness equipment sold to franchisees by the franchisor. As of the series 2019-1 closing date, the transaction was backed by a pool of 1,899 units, 96% of which are owned by franchisees and 97.3% of which were located in the U.S.
The notes benefit from various liquidity resources, including an interest reserve account sized to cover three months of accrued interest. Additionally, in order to bolster the transaction's liquidity, Planet Fitness waived its management fee for the most recent collection period and has instructed the transaction trustee to redirect residual cash flows to the transaction debt service account, fully funding the upcoming first quarter principal and interest (P&I) payment and partially funding the second quarter P&I payment with the remainder. Additionally, on its upcoming allocation date for the current collection period, Planet Fitness intends to prefund incremental second quarter P&I with membership dues that have been collected in mid-March but not yet allocated. Also, Planet Fitness drew the full $75 million capacity of its VFN into an special purpose vehicle cash account, whose balance can be used to fund interest if necessary. We note that Planet Fitness can withdraw that cash at will; however, it would be unlikely to do so if the cash is needed to prevent interest shortfalls on the notes. Finally, cash outside the structure held by Planet Fitness could be contributed to the structure via manager advances and retained collection contributions. Until Planet Fitness' gyms are reopened, and it can resume collecting membership dues, Planet Fitness' noteholders will be largely dependent on these mentioned liquidity resources for debt service coverage.
We expect to resolve the CreditWatch placement as we learn more about the severity and duration of COVID-19's impact on the Planet Fitness brands as a whole. We will consider the sufficiency of the transaction's liquidity resources, the expected duration of store closures, and the percentage of pre-pandemic revenue that will be restored in expected and stressed scenarios.
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