$245 million of securities rated
New York, February 04, 2011 -- Moody's Investors Service has assigned a provisional rating of (P) Baa2
(sf) to the Series 2011-1 Class A-1 Senior Secured Revolving
Notes, and Class A-2 Senior Secured Notes (together with
Class A-1, the Notes) to be issued by Cajun Global LLC (the
Master Issuer) which owns and franchises quick service restaurants (QSRs)
operating under the Church's Chicken and Texas Chicken brands in
the U.S. and internationally. Cajun Operating Company
(Cajun), the parent of the Master Issuer and a wholly-owned
subsidiary of Church's Holding Corp. (Church's),
will be the manager of the assets. The Notes will have an anticipated
repayment date (ARD) in February 2018 and a legal final maturity date
in February 2041. The Notes will be co-issued by Cajun Funding
Corp., Cajun Restaurants LLC, and Cajun Realty LLC,
each of which is a special purpose entity directly wholly-owned
by the Master Issuer. This transaction represents the first whole
business securitization since the financial crisis.
The complete rating action is as follows:
Issuer: Cajun Global LLC
$25,000,000 (maximum commitment) Series 2011-1
Class A-1 Senior Secured Revolving Notes, rated (P)Baa2 (sf)
$220,000,000 Series 2011-1 Class A-2
Senior Secured Notes, rated (P)Baa2 (sf)
RATING RATIONALE
The Church's Chicken restaurant system compete in the same category
as KFC and Popeye's, with a differentiating focus on value.
It has a presence in 29 states in the U.S. with a major
regional presence in Texas, and 23 countries internationally.
The entire system includes 270 company-owned and operated locations
in the U.S. and 1,446 franchised locations of which
980 are domestic and 466 international. The Notes are collateralized
by essentially all of the tangible and intangible assets comprising the
owned and franchised Church's Chicken and Texas Chicken business,
both domestic and international. The ratings on the notes are based
primarily on the following factors: (i) the strength of the Church's
Chicken brand in the U.S. and the Americas and the Texas
Chicken brand in most of its markets outside the U.S.;
(ii) the sizing of the Notes issuance as evidenced by an estimated debt
to adjusted EBITDA ratio of 5.3x and debt to securitization net
cash flow ratio of 4.9x; (iii) structural features of the
transaction including partial amortization of the Class A-2 notes
prior to the ARD, a debt service reserve account, as well
as debt service coverage ratio (DSCR) triggers leading to cash trap,
rapid amortization, manager termination event, and/or event
of default; (iv) the operational capabilities, track record
and expertise of the Cajun management team; (v) the role of Midland
Loan Services, Inc.(Midland), a division of PNC Bank,
N.A. (A2 senior unsecured), as the servicer to monitor
the transaction and to perform other duties as well as making servicing
advances based on recoverability test; (vi) the role of FTI Consulting,
Inc. as the backup manager to oversee transaction performance and
to facilitate manager replacement with the assistance and oversight of
the servicer; (vii) the role of Midland as the control party to facilitate
efficient replacement of manager upon the occurrence of an manager termination
event; and (viii) the transaction structure designed to ring-fence
certain cashflows in the securitization structure and to isolate the operating
risks of the assets from the bankruptcy risk of Cajun.
The principal methodology used in rating the notes is described below.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website. Additional
research is available on http://www.moodys.com.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
in this transaction.
V-SCORE AND PARAMETER SENSITIVITIES
Moody's V Score. The V Score for this transaction is Medium-High.
The V Score indicates "Medium-High" uncertainty about critical
assumptions. Moody's V Scores provide a relative assessment of
the quality of available credit information and the potential variability
around the various inputs to a rating determination. The V Score
ranks transactions by the potential for significant rating changes owing
to uncertainty around the assumptions that underlie the ratings within
the categories of data quality, historical performance and the level
of disclosure for each of the asset class sector and the issuer;
transaction complexity, analytical modeling and the market value
risk; transaction governance, backup servicing, alignment
of interests and legal, regulatory and other risks. V Scores
apply to the entire transaction (rather than individual tranches).
While the overall score is Medium-High, significant deviations
from 'Medium' within the individual categories include the following:
transaction complexity risk, which is judged to be medium-high
due to the nature of whole business securitization including anticipated
repayments dates, rapid amortization events, cash trap events
and the presence of a variable funding note; analytical complexity
is determined to be medium high due to the use of a deal-specific
cashflow model and the many inputs included in the analysis, legal,
regulatory and other risks, which is medium-high due to the
limited history of whole business securitization structures and lack of
legal test; alignment of interests risk which is low, due to
the totality of the collateral package and the substantial amount of equity
held by the sponsor; and market value sensitivity, which is
medium-low due to low exposure to asset liquidation events giving
rise to market value risk, since the rated notes are repaid via
cash flow in almost any scenario.
Moody's Parameter Sensitivities. We analyzed the potential model-indicated
rating impact under different stress scenarios across two sets of variables:
(a) total store count growth rate and the store average unit volume (AUV)
growth rate and (b) the probability of a distressed event such as the
QSR concept in trouble. We assume a 30% haircut to the cashflows
for five years following the occurrence of such an event. The probability
of a distressed event is assumed to be consistent with a speculative grade
rating assumed as our base case. For (a), we stress the Moody's
base case assumptions further by assuming a downward parallel shift of
the triangular distributions assumed for such variables. For (b),
we stress the likelihood of an event of concept in trouble by increasing
the probability of its occurrence, i.e., we
stress the likelihood of such an event further by further lowering the
assumed base case rating by one notch and two notches, respectively.
The parameter sensitivity stress results show that the initial (P)Baa2
(sf) rating might change as follows: (i) with the probability of
an event of concept in trouble being low investment grade, if the
annual store growth rate and the annual AUV growth rate is lowered by
50 bps, 100 bps and 150 bps, respectively, the model-indicated
results will change to Baa3, Ba2 and B2, respectively;
(ii) with the probability of an event of concept in trouble being one
notch below the assumed base case rating, if the annual store growth
rate and the annual AUV growth rate is lowered by 50 bps, 100 bps
and 150 bps, respectively, the model-indicated results
will change to Ba1, Ba3 and B3, respectively; and (iii)
with the probability of an event of concept in trouble being two notched
below the assumed the base case rating, if the annual store growth
rate and the annual AUV growth rate is lowered by 50 bps, 100 bps
and 150 bps, respectively, the model-indicated results
will change to Ba1, B1 and B3, respectively.
Parameter Sensitivities are not intended to measure how the rating of
the security might migrate over time; rather they are designed to
provide a quantitative calculation of how the initial rating might change
if key input parameters used in the initial rating process differed.
The analysis assumes that the deal has not aged. Parameter Sensitivities
only reflect the ratings impact of each scenario from a quantitative/model-indicated
standpoint. Qualitative factors are also taken into consideration
in the ratings process, so the actual ratings that would be assigned
in each case could vary from the information presented in the Parameter
Sensitivity analysis.
PRINCIPAL METHODOLOGY
Moody's analyzes cash flows of the proposed securitization and evaluates
their sufficiency to make timely interest payments on the notes and repay
the principal by the legal maturity dates. We identify key drivers
of the cash flows and estimate their expected value over the course of
the transaction as well as the probability distribution around that value.
We derive expected revenues and distributions based on the analysis of
historical performance trends of the collateral. Moody's analyzed
not only Cajun's historical data, but also available industry
data of similar franchisors. The simulated revenues were then fed
through the priority of payments to assess potential performance of the
notes under different expected and stressed scenarios.
Parameters which were incorporated in projecting ongoing cash flows include
(i) the system-wide store count and historical AUV performance,
(ii) the profit margin of company-owned restaurants (iii) the level
of royalties and other revenue streams, (iv) default risk of the
manager and the potential adverse impact on franchisees and on company-owned
restaurants, (v) the overall quality and viability of the brand
and (vi) the likelihood of a foreign exchange depreciation event which
causes a reduction of international royalties and franchise fee in U.S.
dollars. Revenue streams, including franchise royalties,
were derived from historical data and modeled using triangular distributions.
A stressed estimate on Cajun's corporate credit was incorporated
into the analysis to derive the corresponding probability of default of
the manager. In certain cash flow runs, a company's default
would result in a reduction of collections for five years, followed
by their restoration to the pre-stressed levels.
The simulated cash flows were used to make all required payments per the
transaction's priority of payments, including interest and principal
payments due on the notes. A resulting loss of yield to investors,
if any, was calculated.
The results in terms of reduction in average yield were consistent with
the rating. Several of the key stresses and assumptions were tested.
Moody's additionally considered default frequency as well as expected
loss on the notes in deciding the ratings. We also factored into
our rating other traditional metrics such as leverage multiples (particularly
debt to adjusted EBITDA and debt to securitized net cash flow) and debt
service coverage ratios.
Furthermore, we also consider qualitative assessments on the viability
of the brand, the experience of the manager in operating the business
on behalf of the Master Issuer, and the soundness of the transaction
structure designed to ring-fence certain cashflows in the securitization
structure and to isolate the operating risks of the assets from the bankruptcy
risk of Cajun.
In addition, Moody's publishes a weekly summary of structured finance
credit, ratings and methodologies, available to all registered
users of our website, at www.moodys.com/SFQuickCheck.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, parties
not involved in the ratings, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the obligation satisfactory for the purposes of assigning a credit
rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Xiaochao Wang
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns a provisional rating to Cajun Global LLC whole business securitization
