Bank of America and GE Capital are currently running TV commercials touting their lending partnerships with clients — Pink’s Hot Dogs and Wendy’s franchisee Bridgeman Foods, respectively — but ask most operators today whether they can easily secure a loan, and the answer will be no.
Annual chain restaurant loan originations are still below 2008 levels, according to Restaurant Research LLC, a restaurant data analysis firm in Redding Ridge, Conn. Loan originations totaled about $7.1 billion in 2007, then fell to $4.5 billion in 2008, and have since then dipped even further, hitting $3.0 billion in 2009. During 2010 and 2011, total originations showed an uptick — to $4.0 billion and $4.3 billion, respectively — but are still below prior levels.
The lack of growth financing means many operators can’t secure enough capital to expand into new markets, open units, remodel existing ones or purchase equipment for new menu items.
“Access to capital will remain the No. 1 issue for franchising in 2012,” said Stephen J. Caldeira, president and chief executive of the International Franchise Association. “While there has been a bit of a thaw for both big and small businesses, there is a long way to go.”
Restaurant Research also reports significant changes to underwriting guidelines, making it harder for operators to qualify for what loans may be on the table. According to a Restaurant Research lender survey in January 2011, the minimum equity requirements for acquisitions totaled 22.3 percent in 2006 and 26.6 percent in 2011, a 19-percent increase over five years. For new construction, minimum equity requirements rose even more — nearly 58 percent — during those same five years, from a 17.5-percent requirement in 2006 to a 27.6-percent requirement in 2011.
One more hurdle: The maximum debt-to-earnings ratio also has shrunk, meaning lenders want to see less debt on the balance sheets, against a company’s earnings before interest, tax, depreciation and amortization. In 2006 a maximum debt-to-EBITDA ratio was 5.5 times, which then shrunk to 3.8 times in 2011.
“I do believe this is the new normal,” said Stephen Dunn, senior vice president of global development at Denny’s Corp. “It doesn’t mean you can’t get things done, but you do have to adjust to the rules.”
Denny’s is doing just that. The Spartanburg, S.C.-based company, which operates or franchises more than 1,670 family-dining restaurants worldwide, recently inked a deal with Pinnacle Commercial Capital to create a $100 million loan pool for new and existing franchisees opening restaurants in underpenetrated U.S. markets. It provides access to capital for franchisees working with Denny’s under its “New and Emerging Market Incentive Program,” which provides reduced fees for franchisees that develop a certain number of units.
Denny’s successfully used a similar pre-arranged loan pool with Pinnacle Commercial Capital in the now-completed conversion of 123 restaurants at Pilot Flying J Travel Centers, which resulted from Denny’s deal with the rest-stop plaza operator. Denny’s will again use Pinnacle to help secure financing for growth, and the charges between Denny’s and Pinnacle rest on the size of the specific deals. Dunn said loans would average between $1 million and $4 million and that Denny’s plans to use the entire $100 million pool.
“We did experience the crunch. … The length of time to get deals done was one of the big factors, ratios changed, much more due diligence was needed, credit protocols changed,” Dunn said. “We had to adjust. We can’t let [the lack of] lending slow us down. We know there is money out there. We have to get to it in a smarter way.”
The program will be managed by Pinnacle, an Indianapolis-based specialty commercial finance company, which partners with BancAlliance, a bank-controlled cooperative managed by Alliance Partners.
Wingstop, the Richardson, Texas-based wing chain with about 500 locations, also recently debuted a $15 million program to provide financing for existing or new franchisees. The financing will be provided through Franchise America Finance and The Bancorp Bank, a wholly owned subsidiary of The Bancorp Inc.
Marco’s Pizza, the Toledo, Ohio-based, 250-unit pizza delivery chain, has developed several financing programs over the past few years, including the use of personal-guarantee insurance, which makes loans more attractive to banks by the coverage of up to 70 percent of the borrower’s liability.
“You’ll start seeing this more and more [among franchisors],” Dunn said. “It’s the world we live in today. You’ve got to get up and be more actively involved.”
Traditional national lenders say they aren’t all together shutting doors on restaurants and are in fact even bullish on 2012. While outside factors, such as the unsteady economic environment in the United States and Europe, continue to affect the cost of funding, there is capital to deploy. In November, at the Franchise Times Restaurant Finance and Development Conference in Las Vegas, a panel of some of the restaurant industry’s top lenders said financing is available, especially to the right brands, management teams and franchisees working with strong franchisors.
“We will continue to look for the same things in any transaction: Do we know the people? What is the concept’s track record?” Randy Schultz, managing director at Regions Bank, said.
Whether a brand is gaining market share, is relevant with consumers, is led by a solid management team and has strong unit economics will determine whether a lender stands behind a deal.
“[We look at] the concept integrity, the brand integrity, when evaluating deals,” said William Johnson, senior vice president of United Capital Business Lending. “For 2012, we’re very bullish.”
Trey Brown, senior managing director at GE Capital, Franchise Finance, said he was encouraged by the shift of lending mix over the past two years. In 2010, he noted that 65 percent of lending was used for refinancing or restructuring, while in 2011, 70 percent of lending rested on funds related to new activity, meaning growth or acquisitions.
He said an outlook on the year ahead may be difficult, as so much change could occur through economic shifts or political swings.
“I’m a relative optimist,” he said, “but for 2012 I’m not sure what that means.”