Falcon Finds New Niche in 144A Franchise


In light of a well received debut franchise loan securitization, Falcon Financial LLC will come to market twice next year with the first of two private offerings planned for early second quarter, said Falcon's Chief Operating Officer David A. Karp.

Both deals will range between $125 million and $150 million in size, and will be structured in accordance with Rule 144A guidelines. Though Falcon has yet to choose an underwriter, Karp did say, "We were very pleased with the work Goldman, Sachs & Co. did for us in connection with the first securitization."

Of note, Falcon's $105 million pricing in August marked the franchise sector's inaugural auto dealership loan-backed deal. The offering, managed solely by Goldman, was backed by a $115 million loan pool.

"The structure was consistent with what you'll see with other franchise lenders," Karp said. "Subordination levels were comparable. It worked well for us last time around, so going forward it is likely we'll follow the same model."

Falcon Financial, a privately held company, is owned by its senior management in conjunction with SunAmerica and an affiliate of Goldman. The company was founded in 1997.

Dealing With Dealers

Though Falcon was the first to do it, the private market will likely see other lenders launching auto dealership deals, Karp explained, because the collateral is attractive.

"In terms of performance data on securitized loans, obviously, since the first deal was only done this year, it's hard to draw comparisons," said Karp.

"What we have been able to do is draw comparisons from industry default data for auto dealerships as compared to other franchise concepts," he said. "The performance data for auto dealerships is actually quite strong. The failure rates for dealerships are actually quite low on a historical basis."

Karp said there has generally been a perception that the auto industry is a cyclical industry, and therefore auto dealerships are a risky credit.

However, the opposite is true, he said. Profitability of dealerships has been quite good and quite stable. And while investors and consumers may see fluctuations in the sales of cars and fluctuations in the earnings of the manufactures, the distributors, which are the dealerships, perform quite well.

"This initiative validates a new asset class in franchise loan securitization, based on the investor appetite for these bonds and the favorable subordination levels from the ratings agencies," said Karp.

Indeed the sector will grow as a result, he explained.

"There are other franchise lenders who are looking at the asset class," Karp said. "And these are some of the companies who have traditionally been in the quick service restaurant and C-stores industries, and they're now trying to branch out into other asset classes."

However, Karp explained, Falcon has an advantage over diversified lenders, as the company's primary focus is retail auto lending.

"One of the unique things about our company, within the franchise lending sector overall, is that we focus on one, and only one asset class, which is new car franchise auto dealerships," he said.

Specialization And Expertise

Though a relatively new company, from creation Falcon intended on dealing strictly in the retail auto sector, and has therefore been staffed with industry veterans, Karp said.

"One of our founding partners is a former auto dealer, and was an auto dealer for slightly in excess of 10 years. And that's just an example of the industry expertise we have," he said. "Within our origination group, we've drawn from people who have been lenders in the auto retailing industry - people who have come from some of the top names in wholesale lending to dealerships.

"The important thing is that we've made a conscious and strategic effort to staff our organization, particularly on the credit side with individuals having solid and extensive credit underwriting experience within the automotive retailing industry," he said.

The emphasis is on focus and industry expertise, Karp said. Falcon works toward understanding the industry and understanding the borrowers, and developing the manufacturer relationships that are necessary "to not only originate on a prudent basis but to provide servicing on both a prudent basis and an added-value basis when called upon."

Additionally, with a focus on quality and collateral performance, Falcon will only lend to name-brand concepts.

"The borrower needs to have a name plate franchise," Karp explained. "For example, it has to be a Ford dealer, a Toyota dealer, or another type of new car dealer, as opposed to the independent used car dealership."

Mono-Sector Growth

Falcon is geared for some sizeable growth this year, Karp said. Consider that the August deal was $115 million, and represented a substantial chunk of the company's origination volume. This year, Karp projects, Falcon is likely to securitize as much as $300 million.

"That really means we're talking about doing between $250 million and $300 million worth of origination over the next year, as compared with the $115 million or so we did in the previous year plus," he said.

Though even as Falcon will show considerable development going forward, the investor shouldn't expect new products from the company - not anytime soon at least.

"We've made the decision not to get into other asset classes - like quick service restaurants, or C-stores - because we don't want to spread ourselves thin in terms of focus and industry expertise," Karp explained.

In terms of innovation: perhaps a public deal in years to come?

"There are no immediate plans," Karp said. "Though obviously [the public market] is one of many strategic directions the company considers."