DBRS Morningstar Takes Rating Actions on Two FAT Brands Royalty I, LLC Securities

DBRS, Inc. (DBRS Morningstar) placed the ratings of the following two classes of securities issued by FAT Brands Royalty I, LLC Under Review with Negative Implications:

-- Series 2020-1, Class A-2 Notes rated BB (sf)
-- Series 2020-1, Class B-2 Notes rated B (sf)

Due to the widespread shutdown of economic activity throughout the U.S. due to the Coronavirus Disease (COVID-19) pandemic, significant stress on the whole-business sector is expected to continue during upcoming months. Consequently, DBRS Morningstar expects the performance of certain whole-business securitization transactions to be negatively affected. The ultimate severity and length of revenue decline is still uncertain at this point.

FAT Brands Royalty I, LLC closed in March 2020 and no trustee reports on transaction performance have yet to be published.

The rating actions by DBRS Morningstar are based on the following analytical considerations:

(1) Restaurant businesses including that of FAT Brands, Inc. and their eight franchised chains are especially vulnerable to the impact from the coronavirus outbreak as a result of sharply lower or nonexistent consumer foot traffic, supply chain disruptions, and the possibility of employee absences. Stay-at-home measures and closures of nonessential businesses enacted by government authorities throughout the U.S. have either shutdown or drastically curtailed the operations of restaurants, which could affect FAT Brand’s franchisees’ financial condition and ability to make payment obligations to FAT Brands Royalty I, LLC.

(2) The information about the extent of impact of coronavirus on FAT Brands, Inc’s restaurants to date, which was shared with DBRS Morningstar by the company.

(3) DBRS Morningstar’s assessment as to how collateral performance could deteriorate due to macroeconomic stresses brought about by the coronavirus pandemic. This assessment was guided by DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus pandemic that can be found in the publication titled <a href="https://www.dbrsmorningstar.com/research/359679/" target="_blank">”Global Macroeconomic Scenarios: Implications for Credit Ratings,”</a> published on April 16, 2020.

(4) Transaction stresses were applied consistent with the Moderate Scenario for the United States whereby it is anticipated the coronavirus will begin to be contained during Q2 2020, resulting in a gradual relaxation of stay-at-home measures and nonessential business closures, allowing a gradual economic recovery to begin starting in Q3 2020. As a result, the applicable stresses to the FAT Brands Royalty I, LLC transaction include a sharp decline in revenues over the next six months, followed by a gradual but limited improvement in revenues over 12 months to simulate a significant decline in consumer demand and spike in unemployment in a short timeframe consistent with the gross domestic product and unemployment estimates in the Moderate Scenario. These stresses result in breakeven revenue decline thresholds the transaction can sustain for the remainder of the transaction’s life that are marginally less than those at deal closing. At the same time, how quickly customers resume dining in these establishments remains uncertain, possibly even after the immediate period when state and local guidelines on quarantine and social distancing end.

(5) A potential material impact of the U.S. government intervention on the ability of many small businesses to survive through the shutdown in the short term, until the economy starts to re-open. Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act included a $349 billion appropriation for a significant expansion of guaranteed lending under Section 7(a) of the Small Business Act through a new Paycheck Protection Program (PPP). Eligible businesses began applying on April 3, 2020, and the entire amount has already been allocated by the lenders. While exact impact of these efforts by the Government remains uncertain, they are expected to benefit franchise businesses and soften the impact of the coronavirus by allowing companies to keep employees to be able to restart operations faster and more seamlessly and to use other available liquidity to support non-payroll business needs. The company’s franchise brands are listed in the Small Business Administration’s Franchise Directory which should support their eligibility for this government assistance.

(6) Some possible mitigation to revenue decline as FAT Brands, Inc’s various franchise restaurants offer and enhance their pick-up and delivery services given their relationships with several of the major delivery aggregators, including Grubhub, Uber Eats, and Postmates, among others.

When a rating is placed Under Review with Negative Implications, DBRS Morningstar seeks to complete its assessment and remove the rating from this status as soon as appropriate. Upon the resolution of the Under Review status, DBRS Morningstar may confirm or downgrade the ratings on the affected classes.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

This press release was amended on March 10, 2021, to reflect the U.S. ABS General Ratings Methodology (December 2018), as the previously released press release inadvertently mislabeled the methodology used.

Notes:
The principal methodology is the U.S. ABS General Ratings Methodology (December 2018), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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