February 24: Industry Risk - Default Rates Decline in US Franchise ABs Though Pressures Persist

By: Andrew Adams | Posted: 10th October 2006

Despite a decline in delinquency and default rates in U.S. Franchise ABS in 2003, weaknesses in the convenience and gas (C&G) sector and with Burger King operators continue to put pressure on performance. According to a Fitch Ratings report, downgrades are expected to exceed upgrades in 2004, maintaining a negative sector outlook.

'Optimism for the sector remains tempered, as it still faces significant challenges,' says analyst Adam Kaplan in Fitch's '2003 Franchise Loan Year-in-Review'. 'Nonetheless, measures of collateral performance for franchise loans are expected to stabilize, though they continue to underperform relative to initial expectations. Operators have been forced to become more efficient, and have better positioned themselves to capitalize on the positive trends produced by the economic recovery.'

Fitch reported that in 2003, 144 new defaults totaled $390 million, for the entire sector, which represents a 61% decline in new defaults from $996 million in 2002. The monthly rate of default also declined, falling 57% from 1.15% in 2002 to 0.49% in 2003.

According to Fitch, the C&G sector showed the most improvement in new defaults. The sector's $125 million in new defaults marked a 78% decline from $557 million in 2002. However, Fitch estimates that, as of Dec. 31, 2003, approximately 46% of all C&G collateral issued had already defaulted.

The quick service restaurant sector (QSR) accounted for $167 million of collateral in default, representing a 42% decrease from 2002. For the second consecutive year, Burger King borrowers were to blame for the majority of QSR defaults, as 38 of the 82 QSR defaults were related to the struggling brand. No other brand accounted for more than six defaults.

Burger King borrowers claimed the dominant share of the newly defaulted QSR collateral, accounting for 39%.

In 2003, according to Fitch, 86 workouts were completed at an average recovery rate of 46%. The weaker recoveries can be attributed to the poor recoveries on QSR loans as a function of their collateral as only 51% of the liquidated QSR collateral was related to fee simple borrowers.

Andrew Adams writes for http://www.magfranchise.org where you can find out more about franchising and other topics.

Andrew Adams writes for http://www.magfranchise.org where you can find out more about franchising and other topics.
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Tags: convenience, burger king, optimism, borrowers, collateral, workouts, decline, default rates, delinquency, downgrades, economic recovery, second consecutive year