Franchise Lenders Reveal Top Tiers: Who’s Getting Financed | Restaurant Finance Across America

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Many factors go into a commercial bank’s decision to lend to a restaurant franchisee. The bank’s internal credit rating system must first accept credit risk in the brand, then bankers can analyze unit economics, same-store sales, debt levels and growth plans of the franchisees. 

A history of franchisee transactions and valuation benchmarks is essential to a lender in this space. The willingness of a franchisor to provide reasonable assistance in a default situation is also important. 

For many years, national restaurant lenders have spoken casually about loaning money to restaurant franchisees in the “first tier” or “second tier” of brands. When asked specifics about the tiers, no one actually can describe which brands are in which tier. The Monitor surveyed a group of senior secured lenders in November to determine whether a tier structure actually exists in franchise lending and where each of the brands rank.  

One simple way to get at the question of whether a franchise tier system exists is to ask the lenders exactly what brands are in their loan portfolios. Obviously, the more lenders that loan money to a particular franchised brand, the higher the rank. Our first question, then, was to ask our survey participants to check off all the brands in their loan portfolio. 

Second, we asked the lenders to identify the brands they were likely to lend to in 2022. Banks with loans outstanding to a particular brand would generally be inclined to make loans to franchisees in that brand during the coming year. By the same token, a deterioration in operating fundamentals of the brand might convince the bank to cut back. Banks also spend a significant portion of their activities on business development and are always on the lookout for potential borrowers not currently on their books. 

Finally, we asked the lenders to identify their five largest brand exposures. This question gets to the heart of whom the lenders actually see as in the top tier of brands, based on the amount of capital they’ve committed. 

Our survey was sent to the department heads of approximately 36 lending institutions with active franchise lending programs and received 19 responses. In measuring the survey results, we assigned a restaurant brand one point each time a lender selected the brand in each of the three questions: current loan exposure, likely to lend in 2022 and whether the brand was in the top five franchise exposures. Each of the three questions received equal weighting and the Monitor ranked the points to select 10 brands, including those that tied, in Tier 1 and 10 brands in Tier 2 (and ties).

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Here are some of the details from our survey:

Wendy’s was clearly the top brand in our loan survey with 44 points. Fifteen of the 19 lenders in our survey held loans with franchisees of Wendy’s and 16 of 19 lenders indicated they would be making loans to Wendy’s franchisees in 2022.

Thirteen of the 19 lenders reported that Wendy’s was in the top five of their loan exposures.  One lender told us that Wendy’s scores well because they have a number of small- to mid-sized franchisee organizations so there are opportunities for lenders to get Wendy’s financings done without being part of a syndicated deal.

Taco Bell was also popular with the lenders, finishing second, with 38 points. Fourteen of the 19 lenders in our survey held loans with franchisees of Taco Bell and 14 indicated they would be making loans to Taco Bell franchisees in 2022. Ten of the 19 lenders said Taco Bell was in the top five of their loan exposures.

Popeyes was third in our survey with 33 points. It especially scored high on the question of intent to lend, with 16 of 19 lenders indicating they intend to make loans to Popeyes franchisees in 2022. Twelve of the 19 lenders currently hold loans with franchisees of Popeyes, but only five of the 19 had Popeyes in their top five of loan exposures. 

Which brands besides Wendy’s, Taco Bell and Popeyes had double-digit loan exposure? Dunkin (14), Pizza Hut (14), KFC (12) and Burger King (11) were well-represented in the portfolios of the 19 lenders that answered our survey.  

Brands we designated in the second tier (and their survey points) included Arby’s (19), Applebee’s (16), Wingstop (14), Five Guys (13), Jack in the Box (11), Dairy Queen (11), Hardee’s (11), Denny’s (10), Panera (10), Buffalo Wild Wings (10) and Carl’s Jr. (10).  

Arby’s and Wingstop seem most likely to eventually move into the top tier. While only seven of the 19 lenders currently held loans with Arby’s franchisees, 12 lenders indicated they were likely to lend money to Arby’s franchisees in 2022. While only four of the 19 lenders currently held loans with Wingstop franchisees, 10 lenders indicated they were likely to lend money to the chicken wing brand in 2022. No lenders listed Arby’s or Wingstop as one of their top-five loan exposures. 

Which brands are trending higher in terms of total number of banks intending to loan money to them in 2022 versus actually loaning to them currently? Wingstop, Arby’s, Popeyes, Domino’s, Culver’s, Papa John’s, Five Guys, El Pollo Loco, Zaxby’s, Marco’s Pizza and Qdoba were the highest rated.

Which brands were trending lower in terms of the total number of banks intending to loan them money in 2022 versus the total actually loaning to them currently? Pizza Hut, Dunkin’, Applebee’s, Subway, Dairy Queen, Hardee’s, Buffalo Wild Wings, Carl’s Jr., Denny’s, Jamba Juice, Mod Pizza, Moe’s Southwest Grill and Papa Murphy’s all registered a lower intent to lend in 2022 among the lenders we surveyed.

Wendy’s, Taco Bell, McDonald’s, Dunkin’, KFC, Burger King, Popeyes, Domino’s, Sonic, Applebee’s, Denny’s, Jimmy John’s, Papa John’s, Jack in the Box, Culver’s and Freddy’s were all ranked by at least one bank as one of the five largest exposures in their loan portfolio. One lender told us that in terms of overall dollars committed to franchising, McDonald’s  was “still the king of the hill.” 

Up-and-coming brands that scored points but did not rank in either Tier 1 or Tier 2 included Jimmy John’s (8), Culver’s (7), Bojangles (7), Jersey Mike’s (7), Little Caesar’s (6), McAlister’s Deli (6), El Pollo Loco (5), Zaxby’s (5) and Freddy’s (5). 

Clearly, the restaurant lenders who answered our survey are focused on QSR brands. On the casual and family dining side, Applebee’s and Denny’s in particular, were well represented in the loan portflios of the senior lenders we surveyed. 

Restaurant lenders have not been as interested in full-service restaurants for some time. However, that might be changing. Veteran restaurant lender Nick Cole, now managing director of MUFG, told a Restaurant Finance & Development Conference audience in November he is “bullish” on fine-dining and casual dining brands because of the improvement in the competitive landscape. 

Thomas Hung, managing director of First Horizon Bank, Restaurant Finance, echoed Cole’s comments: “It’s impressive the way full-service operators improved their off-premise sales,” he said.