Bonds backed by franchise fees or internet bills? The rise of esoteric ABS
The asset-backed securities (ABS) market has evolved from its origins in securitizing auto loans and credit card receivables to now encompass almost anything that generates a somewhat predictable cash flow. The asset-backed securities market is back and looking strong. One of the key trends we’re seeing in securitized credit is the rise of esoteric ABS, like those backed by quick-service restaurant franchise royalties or consumer internet bills.
Understanding Whole Business Securitizations
These whole business securitizations are structured with features of both corporate bonds and traditional ABS, such as those backed by auto loans or credit card receivables. The collateral backing whole business deals is usually a first-priority interest in a company’s primary revenue-generating assets, typically franchise fees and royalties. Unlike much of the ABS market, whole business securitizations share some characteristics—such as lack of material principal amortization—with corporate bonds. When analyzing the credit of a whole business deal, we look for issuers with long operating histories across multiple economic cycles, among other factors.
Opportunities in Fiber-Optic Collateral
Fiber-optic-backed ABS are a slight twist on whole business securitizations. The collateral in these deals can be fiber-optic infrastructure or customer contracts for internet connectivity—current or future. For deals backed by consumer fiber receivables, we don’t view consumer credit quality deterioration as a major risk. After all, people and businesses need to stay connected, so they tend to prioritize paying their internet bill over other obligations.
Evaluating Market Resilience and Value
When searching for relative value among fixed income sectors, we compare the yield available on whole business and fiber ABS to the yield on investment-grade corporate bonds and traditional ABS with similar credit quality. We continue to find value in some esoteric asset‑backed securities (ABS), including those backed by franchise royalties or fees and fiber‑optic collateral. Whole business and fiber ABS are relatively insulated from tariff risks, which differentiates the segment from much of investment‑grade corporate credit. Moreover, these ABS feature relatively unique collateral that tends to be protected by high barriers to entry, strong brand value, or both.
Key Sectors and Issuers in the Esoteric ABS Market
The following table summarizes the primary categories of esoteric ABS discussed and the companies active in this space:
| ABS Category | Primary Collateral Type | Example Issuers |
|---|---|---|
| Whole Business | Franchise royalties and fees | Dunkin’ Brands, Domino’s, Planet Fitness, Servpro |
| Fiber-Optic | Fiber-optic infrastructure or customer contracts | Frontier Communications, Zayo Group |
As the market continues to evolve, we uncover unique opportunities in franchise- and fiber-optic-backed asset-backed securities. This advantage has led us to some attractive opportunities in whole business ABS where collateral provides a first-priority interest in a company’s primary revenue-generating assets.
