DBRS Morningstar Maintains Under Review with Negative Implications Status on FAT Brands Royalty I, LLC Ratings

DBRS, Inc. (DBRS Morningstar) maintained its Under Review with Negative Implications status on the BB (sf) and B (sf) ratings on the Series 2020-1, Class A-2 Notes and the Series 2020-1, Class B-2 Notes, respectively, issued by FAT Brands Royalty I, LLC.

DBRS Morningstar based the maintenance of the Under Review with Negative Implications status on the following analytical considerations:

-- Transaction performance for asset-backed securities (ABS) showed evidence of improvement beginning in Q2 2020 relative to the onset of the Coronavirus Disease (COVID-19) pandemic, amid weakening in the underlying credit profile of the manager related to the pandemic’s impact. Systemwide sales and same-store sales have recovered significantly from the drop experienced as the pandemic hit. The emphasis on enhancing off-premises capabilities (pickup, delivery, and outdoor dining) has helped cushion the impact of the loss in customer foot traffic.

-- The deal’s structural features, including the back-up manager mechanism, FAT Brands’ franchise business model, amortization triggers, and the liquidity of the manager, are positive elements supporting the current ratings.

-- Despite a catalyst to the recovery on the horizon, certainty around when the country can approach herd immunity levels and if this can occur within the year remains to be seen. Concerns over vaccination supply, delivery, eligibility, and the threat of Covid-19 variants loom in the current environment. While DBRS Morningstar expects the vaccine rollout to set the stage for further improvement in transaction performance and the potential for improvement in the underlying credit profile of the manager as consumer confidence returns, more visibility is warranted with respect to the speed and implementation results from the vaccine rollout.

-- The transaction assumptions consider DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus, available in its commentary “Global Macroeconomic Scenarios: January 2021 Update,” published on January 28, 2021. DBRS Morningstar initially published macroeconomic scenarios on April 16, 2020, which have been regularly updated. The scenarios were last updated on January 28, 2021, and are reflected in DBRS Morningstar’s rating analysis.

-- The assumptions consider the moderate and adverse macroeconomic scenarios outlined in the commentary, with the moderate scenario serving as the primary anchor for current ratings. The moderate scenario factors in increasing success in containment during the first half of 2021, enabling the continued relaxation of restrictions.

-- Increased cash flows from the addition of the Johnny Rockets brand into its portfolio of assets. The acquisition grows overall systemwide sales and expands FAT Brands’ geographic footprint.

-- Debt service coverage ratio and leverage-based triggers have not been tripped.

PRIOR RATING ACTIONS
DBRS Morningstar placed both classes of securities Under Review with Negative Implications on April 22, 2020, and maintained the status of Under Review with Negative Implications on July 28, 2020, and November 5, 2020. For more information on the April 22, 2020, rating action, please refer to the press release titled “DBRS Morningstar Takes Rating Actions on Two FAT Brands Royalty I, LLC Securities.” For more information on the July 28, 2020, maintenance of status, please refer to the press release titled “DBRS Morningstar Maintains Under Review with Negative Implications Status on FAT Brands Royalty I.” For more information on the November 5, 2020, maintenance of status, please refer to the press release titled “DBRS Morningstar Maintains Under Review with Negative Implications Status on FAT Brands Royalty I, LLC Ratings.”

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The press release issued on November 5, 2020, inadvertently mislabeled the methodology used and was amended on March 10, 2021.

Notes:
The principal methodology is U.S. ABS General Ratings Methodology (October 19, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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