Wendy's Funding LLC (Series )

Transcription

1 Presale: Wendy's Funding LLC (Series ) Primary Credit Analyst: Alexander Dennis, CFA, Chicago (1) ; Secondary Contacts: Hector O Campos, New York (212) ; hector.campos@standardandpoors.com Weili Chen, New York (1) ; weili.chen@standardandpoors.com Xilun Chen, New York (1) ; xilun.chen@standardandpoors.com Legal Contact: Stuart Stahl, New York (212) ; stuart.stahl@standardandpoors.com Table Of Contents $2.425 Billion Senior Secured Notes Series Rationale Transaction Strengths Transaction Weaknesses Mitigating Factors Wendy's Industry Characteristics: Sector Outlook Transaction Structure Transaction Comparison Scheduled Debt Repayment Collateral MAY 6,

2 Table Of Contents (cont.) Governance Portfolio Characteristics Cash Flow Assumptions Cash Flow Results Sensitivity Analysis Payment Priority Events of Default Rapid Amortization Events Manager Termination Events Cash Trap Events DSCR Legal Matters Surveillance Related Criteria And Research MAY 6,

3 Presale: Wendy's Funding LLC (Series ) $2.425 Billion Senior Secured Notes Series This presale report is based on information as of May 6, The ratings shown are preliminary. This report does not constitute a recommendation to buy, hold, or sell securities. Subsequent information may result in the assignment of final ratings that differ from the preliminary ratings. Preliminary Ratings As Of May 6, 2015 Class Preliminary rating(i) Preliminary amount (mil. $)(iii) A-1(ii) BBB (sf) A-2-I BBB (sf) A-2-II BBB (sf) 1,225.0 A-2-III BBB (sf) (i)the ratings are preliminary and subject to change at any time. They do not address post-ard-contingent interest. (ii)class A-1 are variable-funding notes. Our analysis assumes the entire $150 million will be funded at close. (iii)final issuance amounts may differ. ARD--Anticipated repayment date. Profile Expected closing date June First payment date September Class A-2-I ARD September Class A-2-II ARD June Class A-2-III ARD June Legal final maturity date June Collateral Sole structuring advisor and book-running manager Master issuer Guarantors Trustee Servicer Manager Back-up manager ARD--Anticipated repayment date. Franchise royalty and license payments; securitization intellectual property; other licensing payments; franchisee lease payments; identified contributed company stores; and after mortgages are recorded, certain fee-owned properties. Guggenheim Securities LLC. Wendy's Funding LLC. Quality Is Our Recipe LLC, Wendy's Properties LLC, and Wendy's SPV Guarantor LLC. Citibank N.A. Midland Loan Services (a division of PNC Bank N.A.). Wendy's International LLC. FTI Consulting Inc. Rationale The preliminary 'BBB (sf)' ratings assigned to Wendy's Funding LLC's $2.425 billion senior secured notes series MAY 6,

4 reflect our view of: The strength of the "Wendy's" brand, the likelihood for the brand to survive through a Wendy's International LLC (Wendy's) bankruptcy, and the brand's resulting capacity to continue generating sufficient cash flows from business operations, provided that adequate servicing remains in place. Wendy's business risk profile. The projected cash flows supporting the notes. A reserve account funded with three months of interest expenses and/or a letter of credit, and the servicer's obligation to make interest and collateral protection advances if deemed recoverable. The transaction's structure. Transaction Strengths The transaction's strengths, in our opinion, include the following: The highly franchised nature of Wendy's business, which results in a less volatile cash flow stream. Consistent in system-wide store count and a relatively stable average unit volume (AUV), which has led to steady increases in royalty payments. The securitization structure, with Midland Loan Services (the servicer) acting as the control party, and the servicer's obligation to make interest and collateral protection advances if deemed recoverable. A modest level of principal amortization before the anticipated repayment date (ARD) if leverage is above a certain level. Performance tests, such as rapid amortization and cash trap tests. Transaction Weaknesses We believe the transaction's weaknesses include the following: Wendy's operates in a highly competitive industry with relatively low barriers to entry. The transaction relies on Wendy's systems and management team to manage the assets. Revenues from international operations are not hedged for foreign exchange fluctuation, leaving cash flows vulnerable to potential swings in exchange rates. Geographic concentration in the three largest states accounts for more than 24.3% of the company's total store count. Varying commodity prices can affect the cost of food supplies. Food-borne illness may adversely affect sales and the perception of quality. Mortgages will only be prepared upon a debt service coverage ratio (DSCR) of less than or equal to 1.75x or a rapid amortization, and the mortgages will only be recorded upon a breach of certain performance triggers. Mitigating Factors We believe the following factors partially mitigate the transaction's weaknesses: Wendy's approach to brand management focuses on a combination of marketing, menu, operations, and restaurant remodel initiatives that it believes creates a distinctive connection with its customers. MAY 6,

5 The transaction documents allow the servicer to appoint a successor manager to replace Wendy's if certain events occur, with the back-up manager acting as the interim manager. Wendy's and its franchisees utilize a purchasing co-op to improve purchasing and pricing power, which helps reduce commodity price volatility. Wendy's has a diverse domestic franchise base, with the 10 largest franchisees operating approximately 28% of the total domestic units. Some international franchisees have multiple sub-franchisees, diversifying the franchise base. Revenues from international operations represent a relatively small percentage of total sales. The company operates in 27 international markets (excluding Canada), which may provide some natural hedging to currency fluctuation. Wendy's monitors its franchisees through its franchisee operations system, which provides visibility concerning their performance related to profitability, guest experience, food safety, and training. The company aims to expand mostly in states with low current store counts and presence. Our cash flow runs do not rely on real estate property sales to pass the rating stresses. Under our stress scenario, the notes would receive timely interest and ultimate principal payments by maturity. Wendy's The Wendy's Co. is the world's third-largest quick-service restaurant company in the hamburger sandwich segment. The Wendy's Co. is primarily engaged in the business of operating, developing, and franchising a system of distinctive quick-service restaurants serving high quality food. The company opened its first restaurant in Columbus, Ohio in As of Dec. 28, 2014, there were 6,112 Wendy's brand restaurants in operation in North America. Of these restaurants, 957 were operated by The Wendy's Co., and 5,155 were managed by 407 franchisees. In addition, as of Dec. 28, 2014, there were 403 franchised Wendy's brand restaurants in operation in 27 countries and territories other than North America. The revenues from The Wendy's Co.'s restaurant business are derived from two principal sources: sales at company-owned restaurants; and franchise-related revenues, including royalties, rents, and franchise fees received from franchised restaurants. The Wendy's Co. is also a 50% partner in a Canadian restaurant real estate joint venture with a subsidiary of Restaurant Brands International Inc., a quick-service restaurant company that owns the Tim Hortons brand. The joint venture owns Wendy's/Tim Hortons combo units in Canada. As of Dec. 28, 2014, there were 103 Wendy's brand restaurants in operation that were owned by the joint venture. Industry Characteristics: Sector Outlook The restaurant industry is highly competitive in price and product offerings. Many operators focused on altering menu mix and new products towards value offerings to drive guest traffic. The sector's performance has been mixed due to stagnant economic conditions with meaningful weakness at certain casual dining operators. Ability to take market share will drive revenue and profit. Companies with international presence have expansion opportunities in those markets, and we expect limited domestically for larger chains. We expect slow economic to limit guest traffic gains, and any cost inflation will pressure operating margins over the near term as it likely will not be MAY 6,

6 passed along to customers in full. Transaction Structure Wendy's Funding LLC, a bankruptcy-remote, limited-purpose limited liability company organized under the laws of Delaware, will issue the notes as the master issuer. Wendy's Funding LLC will own Quality Is Our Recipe LLC and Wendy's Properties LLC, both of which are bankruptcy-remote, limited-purpose limited liability companies organized under the laws of Delaware and direct, wholly owned subsidiaries of the master issuer (see chart 1 for the transaction structure). Wendy's SPV Guarantor LLC, a special-purpose Delaware limited liability company and a direct, wholly owned subsidiary of Oldemark LLC, will guarantee the series senior notes. Quality Is Our Recipe LLC, a special purpose Delaware limited liability company and a direct, wholly owned subsidiary of Wendy's Funding LLC, will own: substantially all of the agreements for franchising and store development in the U.S. and all other international markets (excluding Canada); all franchisee notes in the U.S. with respect to such MAY 6,

7 franchised restaurants; and all intellectual property (IP) (other than commercially available software) related to the Wendy's brand. Wendy's Properties LLC, a, special purpose Delaware limited liability company and a direct, wholly owned subsidiary of Wendy's Funding LLC, will own and operate certain branded restaurants located in the U.S. to be contributed to Wendy's Properties; own the contributed real property; serve as lessee with respect to the contributed restaurants where the underlying real estate is owned by a third party; and in connection with the ownership of the contributed real property, serve as lessor. Transaction Comparison We compared this transaction to the DB Master Finance LLC (Dunkin: 'BBB (sf)'); Applebee's Funding LLC/IHOP Funding LLC (DIN; 'BBB (sf)'); Hardee's Funding LLC/Carl's Jr. Funding LLC (CKE; 'BBB- (sf)'); Domino's Pizza Master Issuer LLC (Domino's; 'BBB+ (sf)'); and Sonic Capital LLC (Sonic; 'BBB (sf)') transactions, which we rated in 2015, 2014, 2013, 2012, and 2011, respectively. All five transactions are in the restaurant industry and include royalties from franchised and company-operated stores (see table 1). Table 1 Transaction Comparison Wendy's Funding LLC(i) DB Master Finance LLC(ii) Applebee's Funding LLC/IHOP Funding LLC(iii) Hardee's Funding LLC/Carl's Jr. Funding LLC(iv) Domino's Pizza LLC(v) Sonic Capital LLC(vi) No. of stores 6,491 18,602 3,433 3,318 9,742 3,500 Company-operated stores (%) AUV (mil. $) System-wide sales (bil. $) Royalty type Geographic presence Fixed percentage of sales U.S. and international Fixed percentage of sales U.S. and international Fixed percentage of sales U.S. and international Fixed percentage of sales U.S. and international Fixed percentage of sales U.S. and international Ascending as a percentage of sales Continental U.S. (i)approximations based on system-wide figures for fiscal period ending March (ii)approximations based on system-wide figures for fiscal period ending September 27, (iii)approximations based on domestic system-wide figures for fiscal period ending June 30, Cash flows associated with international operations are not included in the transaction. (iv)approximations based on system-wide figures for fiscal period ending Jan. 31, (v)approximations based on system-wide figures for the 13 fiscal periods ending Jan. 1, (vi)approximations based on system-wide figures for the last 12 months as of Feb. 28, AUV--Average unit volume. Compared with other recent transactions, Wendy's system has a moderately high percentage of company-owned restaurants. Having more franchised restaurants provides stability and less volatile cash flow but may not demonstrate having as much "skin-in-the-game," or being as strategically agile when compared with transactions with lower percentages of franchised stores. Wendy's, Dunkin, DIN, CKE, and Domino's receive royalties at a fixed percentage of sales, while Sonic's royalty stream is calculated based on an ascending scale relative to sales. The ascending royalty scale provides franchisees with more MAY 6,

8 flexibility; however, it could introduce additional pressures on cash flow if sales are strained. The Wendy's and CKE transaction includes cash flows from company-operated restaurant profits, which support the transaction but could be vulnerable to margin compression and require discipline in managing cost structure. The Wendy's, Dunkin, DIN, CKE, and Sonic transactions include rental income from various store locations, which provides additional cash flow, but some of the rent payments may be subject to sales performance at those individual stores. Scheduled Debt Repayment The scheduled debt repayment of the class A-2-I, A-2-II, and A-2-III notes is 1.0% per year, provided that there will not be any scheduled debt repayment due if certain non-amortization tests are met. Collateral The notes will be secured by a security interest in substantially all of the assets of the co-issuers and guarantors, and will include: Contributed and new franchise and development agreements and the related franchisee payments (domestic and international); Securitization IP and IP license agreements; After the mortgages have been recorded, contributed and new owned real property and franchisee lease payments; Transaction accounts; Any interest reserve letter of credit; and Membership interests in the securitization entities. Governance Similar to DBI, DIN, CKE, Domino's, and Sonic, the servicer in the Wendy's transaction is independent from the manager. The servicer will be the control party and be responsible for instructing the trustee to act (at the direction of the controlling class representative [CCR]) at various times, on the trustee's behalf, for the noteholders' benefit. Upon a manager termination event (discussed below), the control party, acting at the CCR's direction, may direct the trustee to remove the manager. Upon the manager's termination following a manager termination event, the manager will assist the back-up manager in providing certain duties until a successor manager is identified and a complete transition to the successor manager is made. The manager's termination or resignation will not become effective until a successor manager has assumed the manager's rights and responsibilities. In our opinion, the back-up manager would likely restructure the existing management infrastructure, which may allow the existing manager to continue to provide management services and, therefore, may help mitigate the potential for disruptions to debt service. The transaction documents provide that the controlling class noteholders may elect a CCR. The servicer and/or the trustee will require the CCR's approval to take certain actions, including: Approving certain waivers, amendments, and other modifications to the transaction documents; MAY 6,

9 Terminating the manager following a manager termination event and approving a replacement manager; Replacing the servicer upon a servicer termination event; Taking or refraining from taking certain actions upon an indenture event of default, including liquidating the collateral; and Accelerating the notes upon an indenture event of default. Portfolio Characteristics As of March 29, 2015, Wendy's had 5,739 stores domestically and 749 stores internationally. Of these, only 858 are company operated (see chart 2 for the company's historical store count). Chart 2 System-wide sales have been relatively stable through the recent downturn (see table 2). Table 2 System-Wide Sales Year Sales (bil. $) MAY 6,

10 Table 2 System-Wide Sales (cont.) In recent years, the average franchise royalty rate has also been stable (see chart 3). Chart 3 By store count, approximately 57% of Wendy's domestic stores are concentrated in 10 U.S. states (see chart 4). MAY 6,

11 Chart 4 By store count, approximately 81% of Wendy's international stores are concentrated in the Americas (see chart 5). MAY 6,

12 Chart 5 Cash Flow Assumptions The transaction's cash flows depend on a number of key inputs, some of which we derived from contractual terms (e.g., royalty rate) and some of which we modeled based on historical performance, rating-dependent economic scenarios, and our expectations of market dynamics. We incorporated a variety of stresses in the form of annual or periodic stresses from domestic and international store closures, as well as reductions in domestic and international AUV, contributed company store profits, and rental and other income. Our internal cash flow model includes input assumptions for the following: Store count; AUV; Contributed company store profits; Rental income; and Other income (primarily consisting of franchisee note receipts). MAY 6,

13 Store count and AUV In our opinion, a variety of factors may affect Wendy's store count and AUV, including: Competition from other restaurants; Consumer demand for Wendy's products; Start-up costs and/or profitability associated with new and existing stores; Operating expenses; Existing and potential franchisees' financial conditions; Availability and cost of financing provided to franchisees; and Potential food-related epidemics. Store count and AUV assumptions We used the number of franchised and company-operated locations, as well as AUV, as of March 2015 in our base-case scenario. We applied stresses using this base store count and AUV. Our base case assumes no additional store openings and no increase in AUV for the first seven years of the transaction. Contributed company store profits In our opinion, a variety of factors may affect contributed company store profits, including: Revenue generated by contributed company-operated stores; Variability of operating expenses; and Operating leverage and cost structure. Our base case assumes no additional in contributed company store profits for the transaction's remainder. Other income In our opinion, a variety of factors may affect changes in other income, including revenue generated, store count, etc. Other income assumptions We used other income (primarily consisting of franchise note receipts) as of March 2015 as a base-case scenario and applied stresses. Our base case assumes no increase in these amounts for the remainder of the transaction. Rental income In our opinion, a variety of factors may affect Wendy's rental income, including revenue generated by the individual restaurants, store locations, and the tenant's financial condition. Rental income assumptions We used gross rental income data from the 12 months ending March 2015 as a base-case scenario. We applied stresses using this base rental income. Our base case assumes no additional increase in rental income for the remainder of the transaction. FX assumptions Approximately 11.5% of the company's total store count is outside the U.S. As such, foreign exchange rates could potentially play a meaningful role in the transaction's cash flows. We applied periodic stresses to non-u.s. dollar revenues due to foreign exchange rate volatility in our rating run stress scenario. MAY 6,

14 Expenses The largest component of the transaction expenses is the management fee, which includes both fixed and variable components as a function of the total stores in operation. According to the transaction documents, the fixed component is assumed to be $52 million annually, and the variable component is assumed to be $15,500 per every franchise and retained company store and $31,000 per every contributed store. The management fee is also subject to a 2% annual increase if it does not exceed 35% of retained collections in the preceding four quarterly collection periods. Variable-funding notes The class A-1 notes are variable-funding notes, and according to the transaction documents, are expected to be undrawn at closing (other than a portion to be issued under letters of credit). However, for our cash flow analysis, we assumed that the notes are fully drawn at closing. Hedging We modeled no hedges. While the transaction documents allow hedges, the transaction currently does not contemplate any interest rate hedges. Servicer advances We assumed that the servicer would not make any interest advances. Cash Flow Results We believe the primary drivers for determining the cash flow generated by the transaction are the number of stores, AUV, international store, licensing agreement profits, and rental income. Our analysis does not address the payment of post-ard-contingent interest. While we view model results as good quantitative indications, qualitative measures associated with the company's and industry's performances and the general economy may also affect the transaction's actual performance. Base-case scenario We assumed no in store count, AUV, international store, licensing agreement profits, or rental income, while expenses increased at 2% inflation per year. Under this scenario, the model indicated that the transaction would be able to pay timely interest and full principal by its legal final maturity. Rating run stress scenario In our analysis, we assumed periodic stresses on store closures, as well as reductions in AUV, international store, licensing agreement profits, and rental income. The assumptions depict a stress level that, in our opinion, is commensurate with a 'BBB' rating category. Under this scenario, the model indicated that the transaction would be able to pay timely interest and full principal by its legal final maturity (see table 3). MAY 6,

15 Table 3 Rating Run Stress Scenario Year U.S. store Net store opening rate (%) AUV rate (%) Rental rate (%) Can. store Intl. store Co. store U.S. AUV Can. AUV Intl. AUV Co. store AUV Retained stores rental Contributed stores rental Franchisees rental EBITDA (%) Other rate (%) 1 (0.10) (0.09) (0.03) (0.10) (0.12) (0.12) (0.12) (0.12) (0.09) (0.09) (0.09) (0.10) (0.09) 2 (0.08) (0.07) (0.09) (0.08) (0.09) (0.09) (0.09) (0.09) (0.07) (0.07) (0.07) (0.08) (0.07) 3 (0.04) (0.03) (0.02) (0.04) (0.04) (0.04) (0.04) (0.04) (0.03) (0.03) (0.03) (0.04) (0.03) 4 (0.04) (0.03) (0.02) (0.04) (0.02) (0.02) (0.02) (0.02) (0.03) (0.03) (0.03) (0.04) (0.03) 5 (0.04) (0.03) (0.02) (0.04) (0.03) (0.03) (0.03) (0.04) (0.03) 6 (0.02) (0.01) (0.02) (0.02) (0.01) (0.01) (0.01) (0.02) (0.01) 7 (0.02) (0.01) (0.02) (0.02) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) Thereafter AUV--Average unit volume. Can.--Canadian. Co.--Company. Intl.--International. Sensitivity Analysis Sensitivity run 1: Management fee stress Using the rating run stress scenario in the table above, we assumed that the management fee increased by approximately 55%. In our opinion, the additional management fee stresses what may potentially occur if the company were to experience a bankruptcy. While the management fee is currently outlined in the transaction documents, we believe that it may be possible that such fees may be renegotiated in a potential bankruptcy scenario. Under this scenario, the model indicated that the transaction would still be able to pay timely interest and full principal payments by its legal final maturity. MAY 6,

16 Sensitivity run 2: Break-even through ARD Starting with the base-case scenario assumptions, we assumed that store count, AUV, rental income, and cash flows from financing operations all decreased for the first 4.25 years of the transaction to estimate the maximum haircut to these inputs that would allow timely interest and full principal payments by the transaction's legal final maturity date. This haircut is approximately 10% annually to each input for the first 4.25 years of the transaction. Sensitivity run 3: Event-driven stress Starting with the base-case scenario assumptions, we determined the maximum haircut to cash flow that would allow timely interest and full principal payments by the transaction's legal final maturity date. This haircut is approximately 55%. We examined several event risks associated with cash flow losses, including AUV losses from the top three states with respect to store count (Florida, Ohio, and Texas), and from the top five franchisees. Under these scenarios, the model showed that the transaction would be able to pay timely interest and full principal by legal final maturity. Payment Priority The transaction currently includes three class A notes that will pay interest and principal quarterly from weekly distributions in the priority shown below (see table 4). Currently, the transaction includes no senior subordinated or subordinated notes; however, the transaction may issue these notes if certain conditions are met. Table 4 Payment Priority Priority Payment 1 Solely for amounts from indemnification, permitted asset dispositions, and insurance/condemnation payments: (a) to the trustee, then the servicer for unreimbursed advances; (b) to the manager for any unreimbursed advances; (c) if a class A-1 note amortization event is continuing, the class A-1 notes; (d) all other senior notes; (e) if item (c) does not apply, the class A-1 notes; (f) to the senior subordinated notes, if any; and (g) to the subordinated notes, if any. 2 To the trustee, then the servicer for unreimbursed advances; then to the manager for unreimbursed advances; and then to the servicer for servicing fees, liquidation fees, and workout fees. 3 Successor manager transition expenses, if any. 4 Management fees. 5 Capped securitization operating expense amount; to the trustee, the post-default capped trustee expense amount; and to the payment of certain mortgage expenses. 6 Interest on the senior notes, the class A-1 note commitment fee amount, and hedge payments, if any. 7 The capped class A-1 note administrative expense amount. 8 Interest on the senior subordinated notes, if any. 9 The senior note interest reserve account deficiency amount; and then the senior subordinated note interest reserve account deficiency amount, if any. 10 The senior notes scheduled principal payment amount, any senior notes scheduled principal payment deficiency amount, and any letter of credit collateralization amounts. 11 Supplemental management fee, if any. 12 So long as no rapid amortization has occurred, if the class A-1 note amortization event is continuing, to the class A-1 notes' principal. 13 If no rapid amortization has occurred, any cash trapping amount to the cash-trap reserve account. 14 If a rapid amortization has occurred and is continuing, all remaining amounts to pay down the class A notes, then any senior subordinated notes. 15 So long as no rapid amortization event has occurred, any senior subordinated notes scheduled principal payment amount; and then senior subordinated notes scheduled principal payment deficiency amount, if any. MAY 6,

17 Table 4 Payment Priority (cont.) 16 Uncapped securitization operating expenses. 17 Uncapped class A-1 note administrative expenses amounts. 18 Other class A-1 note amounts. 19 Interest on the subordinated notes, if any. 20 So long as no rapid amortization event has occurred, the subordinated notes scheduled principal payment amount; and then the subordinated notes scheduled principal payment deficiency amount, if any. 21 If a rapid amortization has occurred and is continuing, all remaining amounts to pay down the subordinated notes, if any. 22 After the ARD, post-ard contingent interest on the senior notes. 23 After the ARD, post-ard contingent interest on any senior subordinated notes. 24 After the ARD, post-ard contingent interest on any subordinated notes. 25 Hedge termination payments and any other unpaid hedge amounts, pro rata. 26 Any unpaid premiums and make-whole prepayment premiums on the senior notes. 27 Any unpaid premiums and make-whole prepayment premiums on any senior subordinated notes. 28 Any unpaid premiums and make-whole prepayment premiums on any subordinated notes. 29 Any remaining funds at the direction of the master issuer. ARD Anticipated repayment date. Events of Default Under the transaction documents, each of the following constitutes an event of default: Failure to make any interest payments when due on the notes, subject to a grace period, provided that the failure to pay post-ard-contingent interest on any payment date (including on the series legal final maturity date) exceeding available amounts according to the payment priority will not constitute an event of default. Failure to make any principal payments when due on the notes, subject to a grace period. A material default in observance of any agreements or covenants in the transaction documents or a material breach of representation and warranty subject to a grace period. Involuntary bankruptcy proceedings are commenced against any securitization entity and are not dismissed within 60 days. An interest-only DSCR of less than 1.10x. Any securitization entity is required to register as an "investment company" under the Investment Company Act. Any transaction document or material portion thereof ceases to be in full force and effect. A failure to maintain a valid and perfected first priority security interest in any material collateral (subject to permitted liens). Any securitization entity fails to materially comply with its formation documents. A final non-appealable ruling has been made by a court of competent jurisdiction that the contribution of the collateral does not constitute a "true contribution." Failure of the franchise entities to have good title in or to any material portion of the collateral (except with respect to real estate assets within six months of the closing date). Certain other events specified in the indenture. MAY 6,

18 Rapid Amortization Events Under the transaction documents, a rapid amortization event will occur if any of the following events or conditions occur and are continuing: The DSCR is less than 1.20x. The ARD passes and the notes have not been repaid, provided that, if the DSCR is greater than 2.0x as of then and the notes are repaid within one calendar year, the rapid amortization event shall no longer be in effect. A manager termination event has occurred. An event of default has occurred. Wendy's system-wide sales as calculated on any quarterly calculation date are less than $5.5 billion. Manager Termination Events Under the transaction documents, a manager termination event will occur if certain events or conditions occur and continue, including: Failure to remit amounts to the collection account three business days (five business days if an international funds transfer is required) after the later of either actual knowledge of a receipt thereof or the date such deposit is required under the related documents. The interest-only DSCR is less than 1.2x. Failure to provide certain certificates or reports required by the indenture, subject to applicable grace periods. Material default in the performance and observation of any provision in the management agreement. Material breach of representation or warranty in the management agreement. The manager's bankruptcy. A final, non-appealable order against the manager decreeing the manager's dissolution that occurs for more than 10 days. A final, non-appealable judgment for an amount over $45 million (net of insured amounts) is rendered against the manager and not discharged within 60 days. Acceleration of more than $45 million of the manager's debt. The management agreement ceases to be in full force and effect or enforceable according to its terms. The failure by any non-securitization entity to comply with specified non-securitization debt cap, and such failure continues for 45 days. A change in management occurs following a change of control. Cash Trap Events Under the transaction documents, a two-stage cash trap event will occur if the DSCR is less than 1.75x, whereby 50% of cash will be trapped, or if the DSCR is less than 1.5x, whereby 100% of cash will be trapped in item 13 of the payment priority. MAY 6,

19 DSCR According to the transaction documents, the DSCR is calculated on a quarterly basis by dividing retained collections (minus securitization operating expenses, management fees, other fees and expenses, and excess equity contribution) by the debt service (interest plus scheduled amortization amount). To calculate the manager termination event and events of default, the DSCR calculation excludes scheduled amortization amounts. Legal Matters In rating this transaction, Standard & Poor's will review the legal matters that it believes are relevant to its analysis, as outlined in its criteria. Surveillance We will maintain active surveillance on the rated notes until the notes mature or are retired. The purpose of surveillance is to assess whether the notes are performing within the initial parameters and assumptions applied to each rating category. The transaction terms require the issuer to supply periodic reports and notices to Standard & Poor's for maintaining continuous surveillance on the rated notes. We view Wendy's performance as an important part of analyzing and monitoring the performance and risks associated with the transaction. While company performance will likely have an effect on the transaction, we believe other factors such as cash flow, debt reduction, and legal framework also contribute to the overall analytical opinion. Related Criteria And Research Related Criteria Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014 Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014 Counterparty Risk Framework Methodology And Assumptions, June 25, 2013 Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012 Understanding Standard & Poor's Rating Definitions, June 3, 2009 U.S. Corporate Securitization Transactions, Oct. 24, 2006 Related Research Global Structured Finance Scenario And Sensitivity Analysis: Understanding The Effects Of Macroeconomic Factors On Credit Quality, July 2, 2014 Request For Comment: Global Framework For Assessing Operational Risk In Structured Finance Transactions Update, May 8, MAY 6,

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