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Credit market remains chilly as banks look to limit exposure

Credit market remains chilly as banks look to limit exposure

While the credit freeze has thawed from its coldest point a year ago, only small drips of capital are falling into the coffers of the restaurant industry.

Operators large and small, as well as the International Franchise Association, or IFA, say that lending remains stalled for restaurants, leading them to predict slowed growth, fewer jobs and a furthering of troubles for an embattled industry already facing reduced consumer spending and expectations for increased costs in 2010.

One franchisor, Papa John’s International Inc., said this month that it would continue franchisee growth incentives that were introduced last year to encourage development. The IFA is continuing to lobby for government help in small-business lending activities. Lenders, meanwhile, do point to some light at the end of the tunnel, claiming they are ready to lend, especially when industry indicators begin to turn around.

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“Our data show that while there will be sufficient capital for franchise development in 2010, banks’ continued risk aversion is limiting their willingness to lend,” said Matthew Shay, president and chief executive of the Washington, D.C.-based IFA.

An IFA survey of franchise business executives found that nearly half, or 49.2 percent, of the survey respondents ranked “financing and access to capital” as their greatest concern. The IFA represents more than 1,250 franchise systems and more than 500 suppliers.

The group said the continuing credit crisis would lead to a $3.4 billion shortfall in lending to franchise businesses in 2010 unless the government intervenes. If no steps are taken to increase the flow of capital into the franchising sector, next year’s projected shortfall could prevent the creation of 134,000 new jobs and $13.9 billion in economic output.

Shay said the IFA’s updated “Small Business Lending Matrix and Analysis,” which was prepared by Frandata, estimates that banks are expected to lend $6.7 billion to franchises in 2010, versus the $10.1 billion that would meet 100 percent of demand. The IFA said the shortfall was caused by banks’ conservative approach to a weak economic outlook and uncertainty in the commercial real estate market.

Shay added that the Small Business Administration could play a critical role in easing credit in 2010. Frandata estimates that if changes are made to the SBA loan programs, available credit could increase in 2010 to $7.8 billion, resulting in 46,000 additional jobs.

Among the modifications urged by the IFA are an increase in maximum SBA loan limits from $2 million to $5 million, changes to borrower fees depending on amortization length, and the addition of a 100-percent guarantee on loans for the first two years of a franchise startup.

“Immediately passing enhancements to government lending programs can shore up the $3.4 billion shortfall in lending,” Shay said. “New franchise businesses can create much-needed jobs, which will speed the U.S. economic recovery.”

At last month’s Restaurant Finance & Development Conference, an event produced by Restaurant Finance Monitor, key lenders said 2010 would continue to be challenging, but that there is plenty of capital, especially for operations that generate cash and for restaurants in desirable sectors such as quick service.

“We all have the capacity to lend to the sector,” said Brian Geraghty, managing director and group head of the global consumer and retail/restaurant group at Bank of America Merrill Lynch. “We need to see foot traffic up, jobs up and confidence up—those have to come back.”

At GE Capital, one of the largest lenders to the restaurant industry, capital allocations will still be down from years past, but will begin to increase, said Trey Brown, senior managing director at GE Capital Solutions, Franchise Finance.

“We’ll place $1.5 billion in new and re-do financings,” he said at the event in Las Vegas. “We have typically done $3.5 billion in the past, so it’s down, but 2010 has the potential to be very reassuring.… We’re climbing back out.”

In the meantime, franchisors still are exploring ways to help franchisees grow. Louisville, Ky.-based Papa John’s said it would carry over its franchise growth initiatives into 2010, offering access to equipment, reduced royalty rates and waived fees to help franchisees grow the third-largest pizza brand.

Through the company’s 2010 U.S. Development Incentive Program, new and existing franchisees could garner a waiver of franchise fees, which normally total $25,000; two Middleby-Marshall ovens, which may be purchased for $50 after the location is operating for two years; and a reduced royalty rate for the first 12 months of operation for restaurants that are opened on time, including a zero-percent royalty for restaurants opened by June.

“Given the continued uncertainty in the economy, we are excited to offer this program to help both existing and potential new franchisees grow within the Papa John’s family,” Jude Thompson, president and chief operating officer of Papa John’s, said in a statement.

The incentives are available for qualifying franchisees that sign new development agreements through November 2010 for unit openings in 2010.

The company’s program for encouraging growth of its domestic franchise system continues incentive policies introduced in April in honor of Papa John’s 25th anniversary. For the earlier round of incentives, the chain waived the franchise fees and royalties for new locations and also gave franchisees a $10,000 bonus for opening their restaurants ahead of schedule.

Papa John’s domestic system grew by 12 net franchised locations in the nine months ended Sept. 27, reflecting the opening of 58 franchised units and the closure of 47 such locations, as well as franchisees acquiring 12 units from Papa John’s International and selling 11 locations back to the franchisor. The company has opened a net total of 68 international franchised locations in 2009. Papa John’s has 3,458 restaurants worldwide.

Ron Ruggless and Mark Brandau contributed to this report.—[email protected]

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