The Dunkin’ Donuts deal turned a lot of heads when it was announced last December. The New England institution had been the subject of a heated auction, with the winning consortium of
Securitizations are nothing new as a financing option. The $15 billion purchase of rental car giant Hertz Corp., for instance, included more than $7 billion of asset-backed debt tied to a securitization of Hertz’s fleet of cars. What differentiates the Dunkin’ Donuts deal from others was the fact that it lined up asset-backed financing (worth around $1.7 billion) linked to a securitization of hypothetical, non-concrete assets—the doughnut and coffee chain’s intellectual property.
“There’s been a tremendous amount of excitement among private equity groups that we were able to get the Dunkin’ [Donuts] financing done,” says Winthrop Minot, a partner at law firm Ropes & Gray, who worked on the deal. “Frankly, people were a little amazed. It felt like a death march at times.”
Dunkin’ Brands, which oversees more than 12,000 Dunkin’ Donuts, Togo’s and Baskin Robbins franchises around the world, reportedly collects over $275 million in franchising and advertising royalties each year. To cement the securitization, Dunkin’ pledged future franchise fees, as well as other intangible assets, as collateral.
“Its fees are all based on the Dunkin’ franchise and the strength of the Dunkin’ Donuts name,” Minot describes. “Because of that, we were able to take all of the intangible assets and put that into the securitization.”
Andrew Balson, a managing director at Bain, said the buyers were approached by Lehman Brothers, which had orchestrated similar arrangements in the past, although never before as acquisition financing. (Quiznos and the Triarc-owned Arby’s are among those that have pursued similar securitizations.) He noted that there were a number of positives to pursuing the arrangement, with little in the way of downside.
While it’s always risky to apply leverage, Balson described the securitization option as less so when compared to other options and adds that it “better supports the company’s growth plan” than traditional financing alternatives. He further cites, “There’s only one covenant restriction, and no forced amortization.”
Perhaps more important, though, is that the securitization was significantly cheaper than securing high yield bonds. According to Balson, the securitization saves the company between $30 million and $35 million in annual interest payments versus the high-yield alternative. He notes that the valuation impact of those savings translated into a higher bid “to some degree” for the buyers.
From the lenders’ perspective, the securitization helps keep the borrowers at ease in that it allows for quicker access to collateral should trouble arise. Minot cites, “They know where their collateral is and they know they wouldn’t have to fight with the other creditors to get to it.”
Moreover, the yields for asset-backed securities tend to be higher than traditional debt with similar ratings.
Marketwatchers are anticipating that the Dunkin’ Donuts deal will spawn future IP securitizations. When the Dunkin’ financing was finalized, the $1.7 billion securitization was the largest intellectual property deal in the market by a longshot.
Already, it has been surpassed. In May, KCD IP closed what is now the largest IP securitization, according to Securitization News, securing $1.8 billion in asset-backed financing linked to its trademark royalties and related rights. KCD has been described as a products and services business.
Raymond Millien, general counsel at IP specialist
If Dunkin’ Donuts’ new smoothies can generate the same kind of buzz, the investors will have found themselves a winner.