FOCUS Brands Funding LLC (Series )

Transcription

1 Presale: FOCUS Brands LLC (Series ) This presale report is based on information as of March 9, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings Class Preliminary rating(i) Preliminary amount (mil. $) A-1(ii) BBB (sf) Up to A-2-I BBB (sf) A-2-II BBB (sf) (i)the rating is preliminary and subject to change at any time. (ii)the class A-1 notes are variable-funding notes. Our analysis assumes the entire $200 million will be funded at close. It does not address post-ard-additional interest. ARD--Anticipated repayment date. Profile Expected closing date April Class A-2-I Anticipated Repayment Date Class A-2-II Anticipated Repayment Date April April First payment date July Legal final maturity date Collateral Trustee Issuer April Existing and future franchise agreements and related franchisee royalties and fees, royalties on existing and future company-owned restaurants, license revenue, vendor rebates, and existing and future intellectual property. Citibank N.A. Focus Brands LLC. Primary Credit Analyst: Alexander Dennis, CFA, Chicago (1) ; alexander.dennis@spglobal.com Secondary Contacts: Tracy Xie, New York (1) ; tracy.qian.xie@spglobal.com See complete contact list on last page(s) MARCH 9,

2 Profile (cont.) Co-issuers Holdco guarantors Servicer Manager Back-up manager Carvel LLC and McAlister's LLC. Focus Holdco LLC, Carvel Holdco LLC, and McAlister's Holdco LLC Midland Loan Services (a division of PNC Bank N.A.). FOCUS Brands Inc. FTI Consulting Inc. ARD--Anticipated repayment date. Rationale The preliminary 'BBB (sf)' ratings assigned to FOCUS Brands LLC's $800 million senior secured notes series reflects our view of: The strength of the Auntie Anne's, Cinnabon, Moe's, Scholtzky's, Carvel, and McAlister's brands; the likelihood for the brands to survive through a FOCUS Brands Inc. (FOCUS Brands, the manager) bankruptcy; and the brands' resulting capacity to continue generating sufficient cash flows from business operations, provided that adequate servicing remains in place; FOCUS Brands' business risk profile; The projected cash flows supporting the notes; A reserve account funded with three months of interest expenses and/or a letter of credit; and The transaction's structure. Transaction Strengths The transaction's strengths, in our opinion, include the following: FOCUS Brands' business is highly franchised (approximately 98% franchised), which results in a less volatile cash flow stream. Stable average unit volume (AUV) and total store count has historically led to steady royalty payments. Additionally, diversification across six brands may result in greater AUV and store count stability for FOCUS Brands as a whole in future economic downturns. The underlying brands generally have long operating histories (around 30 years, except for Carvel and Moe's, which were founded in 1934 and 2000, respectively) that span multiple economic downturns. FOCUS Brands' current corporate business risk profile is "fair," which is higher than some of the other businesses we have reviewed for corporate securitizations. Franchisee concentration is relatively low, with the top 10 franchisees only accounting for approximately 18% of sales globally. The securitization structure, with Midland Loan Services (the servicer) acting as the control party, provides a modest level of principal amortization before the anticipated repayment date (ARD) if leverage is above a certain level. Performance tests include rapid amortization, cash trap, and cash sweep tests. MARCH 9,

3 Transaction Weaknesses We believe the transaction's weaknesses include the following: The brands included in the FOCUS Brands portfolio are a combination of snack and fast casual segments of the restaurant industry, which are highly competitive with relatively low barriers to entry. The "snack brands" (including Cinnabon, Auntie Anne's, and Carvel) may be more volatile in a period of stress, as they generally are not a destination in and of themselves, but are typically dependent on consumers first being in the vicinity of a store (e.g., in a mall where a store is located) and then wanting a snack. Additionally, the remaining brands (McAlister's, Moe's, and Schlotzsky's) are closer to the "fast casual" subset of the restaurant industry, which tends to be more volatile than other quick-service restaurants (i.e., fast food) in periods of stress. Many of the snack brands are located in malls, which have recently seen significant traffic declines. If this trend continues, those stores may see future sales declines, which would reduce royalty revenue for the securitization. One of the brands, Schlotzsky's, filed for chapter 11 bankruptcy protection in FOCUS has a moderate international presence (approximately 24% by store count, or 9% of systemwide sales in the 12 months ended December 2016), and the amount of royalty payments from international franchisees in U.S. dollars will be influenced by foreign exchange rates. Varying commodity prices can affect the cost of food supplies. Food-borne illness may adversely affect sales and the perception of quality. Mitigating Factors We believe the following factors partially mitigate the transaction's weaknesses: Malls only represent 21% of domestic system sales; and according to FOCUS Brands, the majority of these locations are in "A" or "B" malls, which generally are less susceptible to mall traffic declines. As described below, the transaction can withstand a 50% cash flow decline from our base case, which is greater than what malls represent on a sales or store count basis. Our stresses on store count declines and AUVs were split between the snack and non-snack brands. They are both relatively high at a 'BBB' rating level compared to other recently rated transactions, which are partially meant to address future mall-related sales declines for the snack brands as well as additional stress for the fast-casual nature of the non-snack brands. Our analysis suggests the transaction can withstand up to a 49% decline in cash flows from our base case, and the rated notes would still be paid interest and principal on time and in full. The top six franchisees globally represent 13% of sales, which is less than our break-even sales decline. Our cash flow analysis includes currency stresses for any international store where royalties are influenced by foreign exchange rates. Schlotzsky's filing was before FOCUS Brands' purchase of the business in Since 2006, same-store sales have generally been positive. The transaction documents allow the servicer to appoint a successor manager to replace the manager if certain events occur, with the back-up manager acting as manager in the interim. FOCUS' diverse product mix and relationship with various suppliers helps mitigate over-reliance on particular commodity product categories. FOCUS monitors its franchisees with respect to guest experience, food safety, and training. MARCH 9,

4 The weighted average remaining franchise agreement term is approximately 11.5 years. Under our stress scenario, the notes would receive timely interest and ultimate principal payments by maturity. FOCUS Brands Inc. FOCUS Brands Inc. is based in Atlanta, Ga. and owned by the Atlanta-based private equity firm, Roark Capital. FOCUS Brands' six brands include Auntie Anne's, Carvel, Cinnabon, McAlister's, Moe's, and Schlotzsky's. Its 5,135 restaurants, cafes, ice cream stores, and bakeries are operated by approximately 1,800 franchisees across 50 U.S. states and 60 countries. Industry Characteristics: Sector Outlook The restaurant industry is highly competitive and vulnerable to economic downturns. We also believe industry prospects and performance remain dependent on changes in consumer tastes, discretionary income, and substitute offerings, such as eating at home. Many operators have been focused on altering menu mix and new menu offerings, with a focus on value to drive guest traffic. We believe this has heightened industry competition and resulted in weak operating performance for many restaurants. In addition, we expect slow economic growth to limit guest traffic gains, and any cost inflation will pressure operating margins over the near term as it likely will not be passed along to customers in full. However, we also believe that companies with international operations have expansion opportunities, and that operators with operating scale and the ability to take market share will see better results. Transaction Comparison We compared this transaction to the TGIF LLC (TGIF; 'BBB- (sf)'), Driven Brands LLC (Driven; 'BBB- (sf)'), Wendy's LLC (Wendy's; 'BBB (sf)'); DB Master Finance LLC (Dunkin; 'BBB (sf)'); Applebee's LLC/IHOP LLC (DIN; 'BBB (sf)'); Hardee's LLC/Carl's Jr. LLC (CKE; 'BBB- (sf)'); and Domino's Pizza Master Issuer LLC (Domino's; 'BBB+ (sf)') transactions, which we rated in 2017, 2016, 2015, 2015, 2014, 2013, and 2012, respectively. All six transactions are in the restaurant industry and include royalties from franchised and company-operated stores, except for Driven Brands, which is in the automotive aftermarket industry (see table 1). Table 1 Transaction Comparison Focus Brands LLC TGIF, LLC(i) Driven Brands LLC (ii) Wendy's LLC(iii) DB Master Finance LLC(iv) Applebee's LLC/IHOP LLC(v) Hardee's LLC/Carl's Jr. LLC(vi) No. of stores ,246 6,491 18,602 3,433 3,318 9,742 Company-operated stores (%) AUV (mil. $) Domino's Pizza LLC(vii) MARCH 9,

5 Table 1 Transaction Comparison (cont.) Systemwide sales (bil. $) Royalty type Geographic presence Focus Brands LLC TGIF, LLC(i) Driven Brands LLC (ii) Wendy's LLC(iii) DB Master Finance LLC(iv) Applebee's LLC/IHOP LLC(v) Hardee's LLC/Carl's Jr. LLC(vi) Fixed percentage of sales, except for Carvel, which is on a $/gallon basis. U.S. and international Fixed percentage of sales U.S. and international Majority is fixed percentage of sales; a portion is variable based on product/service mix U.S. and Canada Fixed percentage of sales U.S. and international Fixed percentage of sales U.S. and international Fixed percentage of sales U.S. and international Fixed percentage of sales U.S. and international Domino's Pizza LLC(vii) Fixed percentage of sales U.S. and international (i)approximations based on systemwide figures for fiscal period ending September (ii)approximations based on systemwide figures for fiscal period ending March (iii)approximations based on systemwide figures for fiscal period ending March (iv)approximations based on systemwide figures for fiscal period ending Sept. 27, (v)approximations based on domestic systemwide figures for fiscal period ending June 30, Cash flows associated with international operations are not included in the transaction. (vi)approximations based on system-wide figures for fiscal period ending Jan. 31, (vii)approximations based on systemwide figures for the 13 fiscal periods ending Jan. 1, AUV--Average unit volume. FOCUS is relatively strong in terms of store count and having a low percentage of company-owned stores. With the exception of Carvel, the operating history of the contributed brands is generally less than other businesses we have rated, but still quite long (around 30 years compared to 50 years for many other businesses). Transaction Structure FOCUS Brands LLC, a bankruptcy-remote, limited-purpose limited liability company organized under the laws of Delaware, will issue the notes as the master issuer, along with Carvel LLC and McAlister's LLC as co-issuers. The master issuer will own Focus Brands Systems LLC. All of these entities are bankruptcy-remote, limited-purpose limited liability companies organized under Delaware law and are direct or indirect wholly owned subsidiaries of the issuer (see chart 1 for the transaction structure). MARCH 9,

6 Carvel Holdco LLC, Focus Holdco LLC, and McAlister's Holdco LLC will guarantee the series notes, and are special-purpose Delaware limited liability companies and indirectly wholly owned subsidiaries of FOCUS Brands Inc. Carvel Franchisor SPV LLC, Auntie Anne's Franchisor SPV LLC, Cinnabon Franchisor SPV LLC, Schlotzsky's Franchisor SPV LLC, Moe's Franchisor SPV LLC, and McAlister's Franchisor SPV LLC will own the rights as franchisors under all existing and future franchise and development agreements as well as all existing and future MARCH 9,

7 acquired intellectual property relating to each brand. Scheduled Debt Repayment The scheduled debt repayment of the class A-2 notes is 1.0% per year, provided that there will not be any scheduled debt repayment due if certain nonamortization tests are met. Collateral The notes will be secured by a security interest in substantially all of the issuer's and guarantors' revenue-generating assets and will include: Existing and future domestic franchise royalties and fees; Existing and future international franchise royalties and fees; Royalties on existing and future company-owned restaurants; License revenues; Vendor rebates; Existing and future intellectual property; Certain transaction accounts; and A pledge of the equity interests in the issuer and its subsidiaries. Governance Similar to other U.S. corporate securitizations, the servicer for the FOCUS transaction is independent from the manager. The servicer will be the control party and will be responsible for instructing the trustee to act (at the direction of the controlling class representative [CCR]) at various times, on the trustee's behalf, for the noteholders' benefit. Upon a manager termination event (discussed below), the control party, acting at the CCR's direction, may direct the trustee to remove the manager. Upon the manager's termination following a manager termination event, the manager will assist the back-up manager in providing certain duties until a successor manager is identified and a complete transition to the successor manager is made. The manager's termination or resignation will not become effective until a successor manager has assumed the manager's rights and responsibilities. In our opinion, the back-up manager would likely restructure the existing management infrastructure, which may allow the existing manager to continue to provide management services and, therefore, could help mitigate the potential for disruptions to debt service. The transaction documents provide that the controlling class noteholders may elect a CCR. The servicer and/or the trustee will require the CCR's approval to take certain actions, including: Approving certain waivers, amendments, and other modifications to the transaction documents; Terminating the manager following a manager termination event and approving a replacement manager; Replacing the servicer upon a servicer termination event; Taking or refraining from taking certain actions upon an indenture event of default, including liquidating the MARCH 9,

8 collateral; and Accelerating the notes upon an indenture event of default. Portfolio Characteristics As of Dec. 25, 2016, FOCUS had 5,135 stores across all 50 U.S. states, and 59 other countries (see chart 2). Chart 2 Systemwide sales have been stable over the past six years (see table 2). Table 2 Systemwide Sales Fiscal year ending Sales (bil. $) MARCH 9,

9 In recent years, the AUV has also been stable (see chart 3). Chart 3 During the same period, the average royalty rate has been stable as well (see chart 4). MARCH 9,

10 Chart 4 By location count, approximately 32% of FOCUS' locations are concentrated in five U.S. states (see chart 5). MARCH 9,

11 Chart 5 Cash Flow Assumptions The transaction's cash flows depend on a number of key inputs, some of which we derived from contractual terms (e.g., royalty rate) and some of which we modeled based on historical performance, rating-dependent economic scenarios, and our expectations of market dynamics. We incorporated a variety of stresses in the form of annual or periodic stresses from store closures as well as reductions in AUV and license revenues. Our internal cash flow model includes input assumptions for the following: Store count; AUV; and Licensing revenues. Store count and AUV assumptions In our opinion, a variety of factors may affect FOCUS' store count and AUV, including: Competition from other restaurants; Consumer demand for the various brand's products; Start-up costs and/or profitability associated with new and existing stores; MARCH 9,

12 Operating expenses; Existing and potential franchisees' financial conditions; Availability and cost of financing provided to franchisees; and Potential food-related epidemics. We used the number of store locations, as well as AUV, as of December 2016 in our base-case scenario. We applied stresses using this base store count and AUV. The stresses were separated by snack and non-snack brands, with the former generally having higher decline levels. Our base case assumes no additional store openings and no increase in AUV for the remainder of the transaction. Licensing revenues In our opinion, a variety of factors may affect licensing revenues, including: Consumer demand for FOCUS' products; Trends related to demand for cooking at home versus eating at restaurants; and The degree of competition for similar items at their respective point of offering (e.g., other restaurants, groceries, etc.). Our base case assumes no additional growth in licensing revenues for the transaction's remainder. Expenses The largest component of the transaction expenses is the management fee, which includes both fixed and variable components as a function of the total stores in operation. According to the transaction documents, the fixed component is assumed to be $14 million annually, and the variable component is assumed to be $14,800 for every $100,000 of aggregate retained collections over the preceding four quarterly periods. The fixed component of the management fee is also subject to a 2% annual increase if it does not exceed 35% of aggregate retained collections in the preceding four quarterly fiscal periods. Variable-funding notes The class A-1 notes are variable-funding notes, and according to the transaction documents, are expected to be undrawn at closing. However, for our cash flow analysis, we assumed that the notes are fully drawn at closing. Hedging We modeled no hedges. The transaction does not contemplate any interest rate hedges. Servicer advances We assumed that the servicer would not make any interest advances. Cash Flow Results We believe the primary drivers for determining the cash flow generated by the transaction are the number of stores, AUV, and licensing revenues. Our analysis does not include any cash flows generated from vendor rebates, and does not address the payment of post-ard-additional interest. While we view model results as good quantitative indications, qualitative measures associated with the company's and industry's performances and the general economy may also affect the transaction's actual performance. MARCH 9,

13 Base-case scenario We assumed no growth in store count, AUV, or licensing revenues, while expenses increased at 2% inflation per year. Under this scenario, the model indicated that the transaction would be able to pay timely interest and full principal by its legal final maturity. Rating run stress scenario In our analysis, we assumed periodic stresses on store closures as well as reductions in AUV and licensing revenues. The assumptions depict a stress level that, in our opinion, is commensurate with a 'BBB' rating level. Under this scenario, the model indicated that the transaction would be able to pay timely interest and full principal by its legal final maturity (see table 3). Table 3 Rating Run Stress Scenario Net store opening rate (%) AUV growth rate (%) Year U.S. company owned (snack) U.S. franchised (snack) International franchised (snack) U.S. company owned (non-snack) U.S. franchised (non-snack) International franchised (non-snack) U.S. company owned U.S. franchised International franchised Licensing revenue (% of total sales) 1 (5.00) (8.00) (5.00) (5.00) (5.00) (5.00) (9.00) (9.00) (9.00) (8.00) 2 (5.00) (8.00) (8.00) (10.00) (10.00) (10.00) (7.00) (7.00) (7.00) (8.00) 3 (5.00) (8.00) (8.00) (8.00) (8.00) (8.00) (3.00) (3.00) (3.00) (8.00) 4 (5.00) (5.00) (5.00) (4.00) (4.00) (4.00) (3.00) (3.00) (3.00) (5.00) 5 (5.00) (2.00) (2.00) (2.00) (2.00) (2.00) (3.00) (3.00) (3.00) (2.00) 6 (1.00) (1.00) (1.00) (1.00) (1.00) (1.00) (1.00) (1.00) (1.00) (1.00) Thereafter AUV - Average unit volume Sensitivity Analysis Sensitivity run 1: Management fee stress Using the rating run stress scenario in the table above, we assumed that the management fee increased by approximately 14% (translating to an approximately 46.6% reduction in cash flow relative to the base case). In our opinion, the additional management fee stresses what could occur if the company were to experience a bankruptcy. While the management fee is currently outlined in the transaction documents, we believe that it may be possible that such fees might be renegotiated in a potential bankruptcy scenario. Under this scenario, the model indicated that the transaction would still be able to pay timely interest and full principal payments by its legal final maturity. Sensitivity run 2: Event-driven stress Starting with the base-case scenario assumptions, we determined the maximum haircut to cash flow that would allow MARCH 9,

14 timely interest and full principal payments by the transaction's legal final maturity date. This haircut to cash flow after fees is approximately 50%. We examined several event risks associated with cash flow losses, including AUV losses from the top three geographies with respect to store count (Texas, New York, and Florida), and from the top six franchisees. Under these scenarios, the model showed that the transaction would be able to pay timely interest and full principal by legal final maturity. Payment Priority The transaction includes a class A-1 variable-funding note and a class A-2 note that will pay interest and principal quarterly from weekly distributions in the priority shown below (see table 4). Currently, the transaction includes no senior subordinated or subordinated notes; however, the transaction may issue these notes if certain conditions are met. Table 4 Payment Priority Priority Payment 1 Solely related to indemnification amounts, release prices, asset dispositions proceeds, and insurance/condemnation proceeds: to the trustee, then the servicer, for unreimbursed advances; to the manager for any unreimbursed manager advances; if on or after a class A-1 notes' renewal date, principal on the class A-1 notes; if a rapid amortization event has occurred, principal on the class A-1 notes; to prepay the outstanding principal amount of all senior notes (other than the class A-1 notes); to prepay the outstanding principal amount of all senior subordinated notes; and to prepay the outstanding principal amount of all subordinated notes. 2 To the trustee, then the servicer, for unreimbursed advances; then to the manager for any unreimbursed manager advances; and then to the servicer all servicing fees, liquidation fees, and workout fees. 3 Successor manager transition expenses, if any. 4 Weekly management fees. 5 Capped securitization operating expense amount; and so long as an event of default has occurred and is continuing, to the trustee, the post-default capped trustee expense amount. 6 Senior notes accrued quarterly interest amount, and the class A-1 notes' accrued quarterly commitment fees amount, and any accrued and unpaid series hedge payment amount. 7 The capped class A-1 notes' administrative expenses amount. 8 Senior subordinated notes' accrued quarterly interest amount, if any. 9 The senior notes' interest reserve account deficit amount and the senior subordinated note interest reserve account deficit amount, in alphanumerical order of designation. 10 The senior notes' accrued scheduled principal payment amount; any senior notes' scheduled principal payment deficiency amount; amounts then known by the manager that will become due under any class A-1 note purchase agreement before the immediately succeeding quarterly payment date for the cash collateralization of letters of credit issued under such class A-1 notes' purchase agreement; and for any series of class A-1 notes for which their renewal date has not occurred, any outstanding principal amounts due and payable. 11 Supplemental management fee, if any. 12 On or after any class A-1 notes' renewal date, if the class A-1 notes have not been repaid on or before such date, all remaining amounts to the class A-1 notes until their outstanding principal amount is reduced to zero. 13 If no rapid amortization has occurred and is continuing, during a cash-trapping period, the cash-trapping amount. 14 If a rapid amortization has occurred and is continuing, all remaining amounts to pay down the class A-1 notes, then to pay down each remaining class of senior notes, and then to pay down any senior subordinated notes. 15 If a cash flow sweeping period has occurred, to pay 30% of remaining proceeds to the A-2-II notes principal balance. 16 As long as no rapid amortization event has occurred and is continuing, any senior subordinated notes' accrued scheduled principal payment amount; and then senior subordinated notes' scheduled principal payment deficiency amount, if any. 17 Subordinated notes' accrued quarterly interest amount, if any. MARCH 9,

15 Table 4 Payment Priority (cont.) Priority Payment 18 So long as no rapid amortization event has occurred and is continuing, the subordinated notes' accrued scheduled principal payment amount, if any; and then the subordinated notes' scheduled principal payment deficiency amount, if any. 19 If a rapid amortization has occurred and is continuing, all remaining amounts to pay down the subordinated notes, if any. 20 Uncapped securitization operating expenses. 21 Uncapped class A-1 notes' administrative expenses. 22 Class A-1 notes' other amounts. 23 After the ARD, any senior notes accrued quarterly post-ard additional interest amount. 24 After the ARD, any senior subordinated notes' accrued quarterly post-ard additional interest amount. 25 After the ARD, any subordinated notes' accrued quarterly post-ard additional interest amount. 26 Pro rata, any accrued and unpaid series hedge payment amount that constitutes a termination payment payable to a hedge counterparty, and any other due and unpaid amounts payable to a hedge counterparty. 27 Any unpaid premiums and make-whole prepayment consideration. 28 Any remaining funds at the direction of the issuer. ARD--Anticipated repayment date. Events Of Default Under the transaction documents, an event of default includes: Failure to make any interest payments when due on the notes, subject to a grace period, provided that the failure to pay any contingent interest, including the series quarterly post-ard-contingent additional interest on any quarterly payment date (including on the series legal final maturity date) will not constitute an event of default. Failure to make any principal payments when due on the notes, subject to a grace period. A material default in observance of any agreements or covenants in the transaction documents or a material breach of representation and warranty subject to a grace period. Involuntary bankruptcy proceedings are commenced against any securitization entity and are not dismissed within 60 days. An interest-only debt service coverage ratio (DSCR) of less than 1.10x. Any securitization entity is required to register as an "investment company" under the Investment Company Act. Any transaction document or material portion thereof ceases to be enforceable or in full force and effect. A failure to maintain a valid and perfected first-priority security interest in any collateral (subject to permitted liens), other than for collateral with an aggregate fair market value of less than $15 million. Any securitization entity fails to materially comply with its formation documents or the covenant in the base indenture or the guarantee and collateral agreement relating to legal separateness of the securitization entities. A final nonappealable ruling has been made by a court of competent jurisdiction that the contribution of the collateral does not constitute a "true contribution." An outstanding final nonappealable judgment exceeding $15 million is rendered against any securitization entity, and either enforcement proceedings are commenced by any creditor upon such judgment or order, or there is any period of 45 consecutive days during which a stay of enforcement of such judgment or order will not be in effect. Failure of the parent company to own 100% of the equity interests of the co-issuers. Failure of the franchise entities to have good title in or to any material portion of the collateral (other than as MARCH 9,

16 permitted under the indenture or the other transaction documents). Certain ERISA events or the imposition of tax liens on the assets of a securitization entity beyond applicable cure periods. The IRS files notice of a lien with regard to the assets of any securitization entity and has not been released within 60 days. Rapid Amortization Events Under the transaction documents, a rapid amortization event will occur if any of the following events or conditions occur and are continuing: The DSCR is less than 1.20x. Failure to repay any series of notes in full on or before their respective ARD (subject to the opportunity to cure). A manager termination event has occurred. An event of default has occurred. FOCUS Brands' Inc.'s systemwide sales--as calculated on any quarterly calculation date--are less than $1.25 billion, subject to adjustment based on certain dispositions made subject to the control party's approval and rating agency confirmation. Manager Termination Events Under the transaction documents, a manager termination event will occur if certain events or conditions occur and continue, including: Failure to remit amounts to certain transaction accounts within three business days after the later of either actual knowledge of a receipt thereof or the date such deposit is required under the related documents. The interest-only DSCR is less than 1.20x. Failure to provide certain certificates or reports required by the indenture, subject to applicable grace periods. Material default in the performance and observation of any provision in the transaction documents, subject to notice, grace periods, and opportunities to cure. Material breach of representation or warranty, subject to notice and opportunities to cure. The manager's bankruptcy. A final, nonappealable order against the manager decreeing the manager's dissolution that occurs for more than 10 days. A final, nonappealable judgment for an amount over $15 million (net of insured amounts) is rendered against the manager and not discharged within 45 days. Acceleration of more than $25 million of the manager's debt. The management agreement ceases to be in full force and effect or enforceable according to its terms. The failure by the manager to comply with the specified non-securitization debt cap, and such failure continues for 45 days. A change in management occurs following a change of control. MARCH 9,

17 Cash Trap Event Under the transaction documents, a two-stage cash trap event will occur if the DSCR is less than 1.75x, whereby 50% of cash will be trapped, or if the DSCR is less than 1.50x, 100% of cash will be trapped based on item 13 of the payment priority. Cash Flow Sweeping Event Under the transaction documents, a cash flow sweeping event will occur if the DSCR is less than 2.00x, whereby 30% of cash available on item 15 of the waterfall will be used to prepay the class A-2-II notes. DSCR According to the transaction documents, the DSCR is calculated on a quarterly basis by dividing retained collections (minus securitization operating expenses, weekly management fees and supplemental management fees, other fees and expenses, class A-1 notes' administrative expenses, and excess equity contribution) by the debt service (interest plus scheduled amortization amount). To calculate the manager termination event and events of default, the DSCR calculation excludes scheduled amortization amounts. Legal Matters In rating this transaction, S&P Global Ratings will review the legal matters that it believes are relevant to its analysis, as outlined in its criteria. Surveillance We will maintain active surveillance on the rated notes until the notes mature or are retired. The purpose of surveillance is to assess whether the notes are performing within the initial parameters and assumptions applied to each rating category. The transaction terms require the issuer to supply periodic reports and notices to S&P Global Ratings for maintaining continuous surveillance on the rated notes. We view Focus Brands LLC's performance as an important part of analyzing and monitoring the performance and risks associated with the transaction. While company performance will likely have an effect on the transaction, we believe other factors such as cash flow, debt reduction, and legal framework also contribute to the overall analytical opinion. Related Criteria And Research MARCH 9,

18 Related Criteria Criteria - Structured Finance - General: Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions, Aug. 8, 2016 General Criteria: Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014 General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 General Criteria: Understanding Standard & Poor's Rating Definitions, June 3, 2009 Criteria - Structured Finance - ABS: U.S. Corporate Securitization Transactions, Oct. 24, 2006 Legal Criteria: Legal Criteria For U.S. Structured Finance Transactions: Special-Purpose Entities, Oct. 1, 2006 Related Research Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, Dec. 16, 2016 In addition to the criteria specific to this type of security (listed above), the following criteria articles, which are generally applicable to all ratings, may have affected this rating action: "Post-Default Ratings Methodology: When Does Standard & Poor's Raise A Rating From 'D' Or 'SD'?," March 23, 2015; "Global Framework For Assessing Operational Risk In Structured Finance Transactions," Oct. 9, 2014; "Methodology: Timeliness of Payments: Grace Periods, Guarantees, And Use of 'D' And 'SD' Ratings," Oct. 24, 2013; "Counterparty Risk Framework Methodology And Assumptions," June 25, 2013; "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," Oct. 1, 2012; "Methodology: Credit Stability Criteria," May 3, 2010; and "Use of CreditWatch And Outlooks," Sept. 14, Analytical Team Primary Credit Analyst: Alexander Dennis, CFA, Chicago (1) ; alexander.dennis@spglobal.com Secondary Contacts: Tracy Xie, New York (1) ; tracy.qian.xie@spglobal.com Kate R Scanlin, New York (1) ; kate.scanlin@spglobal.com MARCH 9,

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