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Rating Action:

Moody's assigns definitive rating to Cajun Global LLC whole business securitization

Global Credit Research - 25 Feb 2011

$245 million of securities affected.

New York, February 25, 2011 -- Moody's Investors Service has assigned the definitive rating of 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 QSR 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 Baa2 (sf)

$220,000,000 Series 2011-1 Class A-2 Senior Secured Notes, interest rate 5.955%, rated Baa2 (sf)

RATINGS 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 (including Perto Rico and U.S. Virgin Islands) . 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 assets of the Co-ssuers from the bankruptcy risk of Cajun and Church's.

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 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 revenues) of company-owned restaurants (assumed to follow a triangular distribution of (0%, 8%, 17%) (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 (We assumed 14 years in our base case ) and (vi) the likelihood of a foreign exchange depreciation event (5% probability) which causes a 5% 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. The manager's default would result in a 30% 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.

A presale report on this transaction is available at Moodys.com. 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
Xiaochao Wang
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael McDermitt
VP - Senior Credit Officer
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 definitive rating to Cajun Global LLC whole business securitization
No Related Data.
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