Franchise Group Inc.'s Proposed Debt Add-On Assigned 'B+' Rating; Senior Secured Debt Rating Lowered To 'B+'

NEW YORK (S&P Global Ratings) Jan. 24, 2023--S&P Global Ratings today assigned its 'B+' issue-level rating and '3' recovery rating to Franchise Group Inc.'s (FRG; B+/Stable/--) proposed $200 million add-on to their existing first-lien term loan B due in March 2026. The '3' recovery rating indicates our expectation of meaningful (50%-70%; rounded estimate: 60%) recovery for debt holders in the event of a payment default. FRG plans to use the proceeds from the nonfungible add-on to repay the loans outstanding under its asset-based loan (ABL) facility, which will become due in 2026. Although the proposed transaction is leverage neutral and does not affect our 'B+' issuer credit rating, the substantial increase in priority claims reduces recovery prospects for the senior

...expectation of meaningful (50%-70%; rounded estimate: 60%) recovery for debt holders in the event of a payment default. - We lowered our issue-level rating on FRG's existing senior secured term loan due 2026 to 'B+' from '##-'. The substantial increase in priority claims deteriorates the senior secured debt recovery to '3' which indicates our expectation of meaningful (50%-70%; rounded estimate: 60%) recovery for debtholders in the event of a payment default. - Our simulated default scenario contemplates a default in 2027 resulting from an economic downturn, leading to revenue and EBITDA decline. - The simulated default scenario assumes FRG would reorganize as a going concern to maximize lenders' recovery. We have used an enterprise valuation approach to assess recovery prospects and applied a 5x multiple, in line with peers, to our assumed emergence level EBITDA. - Our assumption also reflects that a total of $245 million of borrowings will be outstanding under the company's ABL facility...

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