KBRA Comments on TGIF Funding, LLC Manager Termination Event

According to a September 3, 2024 notice of manager termination, the control party for TGIF Funding LLC Series 2017-1, a whole business securitization (WBS), has declared a manager termination event due to the manager, TGI Friday’s Inc.’s (TGIF’s) failure to furnish a report of the independent auditors or back-up manager summarizing the findings of certain agreed-upon procedures within a certain time period. This is the first instance of a manager termination event for a WBS issued following the GFC.

In accordance with the management agreement between the issuer and manager, the trustee has terminated TGIF as the manager. Following the manager termination event, the transaction will remain in rapid amortization and the back-up manager, FTI Consulting, Inc., will serve as the successor manager and will work with the servicer, Midland Loan Services, to implement the transition plan until a successor manager has been appointed. The transaction had been in rapid amortization since Q2 2020 following the breach of a system-wide sales (SWS)-related trigger.

Until a successor manager has been appointed, the back-up manager will take over various management responsibilities including exercising inspection and audit rights against the securitization entities, restructuring and re-negotiating transaction documents those entities entered into, implementing personnel decisions, and liquidating collateral if reasonably necessary. Management functions include calculating and collecting amounts pertaining to franchise agreements and transaction documents, providing pre-opening and post-opening support to franchisees, overseeing certain advertising and marketing functions, complying with certain reporting requirements, and administering various services to protect transaction intellectual property.

TGIF Funding LLC Series 2017-1 is the only securitization outstanding that is collateralized by TGIF’s existing and future franchise agreements, existing and future company-operated restaurant royalties, license agreements, existing and future intellectual property, and related revenues. The $375 million Class B note is the only class outstanding, has a note factor of 36.7%, and is rated ‘B (sf)’. The securitization’s Class A-1 Note was paid off in full on May 2, 2022. As of Q2 2024, the DSCR for the transaction was 7.45x, largely due to one-time proceeds received from the sale of licensing rights to Kraft Heinz in Q1 2024.

With the current inflationary environment on menu prices over the last several quarters pressuring the casual dining industry in traffic and same-store sales, this transaction has experienced several downgrades. However, the rated security has continued to receive timely interest payments.

KBRA will continue to monitor developments in the transaction, including any performance trends and transition plans, as they occur.