Season 5 Episode 7: The 2023 State of Lending for Franchise Businesses



Also Listen On:

Welcome to the restaurant. Boiler room season five, episode 7.

I'm your host, Rick Ormsby, managing director at Unbridled Capital. Today in the. Boiler room. I'll be talking with long time franchise lenders. Nick Cole of. MUFG and Mike Egan of Synovus Bank.

We will be doing a state of the Union review of the current franchise lending environment and they'll be sharing their thoughts on unbridled recent industry wide lender survey. The restaurant boiler Room is a one stop shop for multimillion dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk, money deals, valuations and risk delivered to the front door of franchisees, private equity firms, family offices, large investors and franchisors on a monthly basis. Feel free to find our content. At unbridled capitals website at, Now let's enter. The boiler room. Well, you guys thank you all for joining it. If you do listen to this on the restaurant boiler room, which is our podcast, which comes out a couple weeks after this webinar, I would just say Howdy podcast listeners and it's hard to believe we're in the middle of our fifth season of podcasting. So I just thank you for your loyalty and. For listening wherever you. May be so.

Thank you for.

That we do. Keep all of our content. Bio Capitals website so you can go there anytime and you can get podcast. You can get this webinar. Or you can. Get a YouTube link to this webinar or YouTube link to the podcast, all from our website and we have all the historical stuff there, so that's WWW dot on Feel free to go to that at anytime if you want. To a quick update. Always do this before each webinar. I think we're on track to close at 12. Unit Taco Bell deal today. And Arizona area that should be closing as we speak. We have 13 other assignments at the moment, four which should close in the next 30 days and they are in the Pizza Hut and Popeyes brands pizza. Popeyes and one other one. And then we just took four new assignments totaling about 300 units in the last two. Weeks and they're in. The Pizza Hut massage. Handy Little Caesars, European wax and KFC are the brands, so the larger deals, big ones, and if you hear this and you're interested or your companies interested in any of those types of assets, you know, please reach out to us in terms of the podcast here, what we're going to do is I'm going to let these gentlemen introduce themselves. I got bang up cast.

Here of All Stars.

Right. These are in a bunch of rookies. These are small. Stars. So when? Nick and Michael treats themselves. We'll jump into this. The reason why I wanted to have them. On is we do an annual. Lender survey and we have. 39 responses to the lender survey we published it and sent it out. On our e-mail platform, you probably.

Call it and I wanted.

Them to come in and give some context and color individually to some of the questions that. We asked. So I think. It'll be really good webinar if you have any questions along the way. You can raise. Your hand and we'll try to, you know, guys watch out for it and and we can answer. The questions as we go. You can also e-mail me afterwards and if it's. Something I can answer? I'll plug it into either of these two. And to answer the question. So we're honored to be here. I'll start off. With the introduction, maybe go Nick. Then Mike, can you guys introduce? Yourself real quickly and we'll just. Jump into the webinar. Thank you for joining.

Thank you. Thank you. Yes, my quick intro. I work at MUFG which is a large shop and he's bank with the American presence and out of the consumer services platform here, which covers the restaurant industry. Of course, which I've been around for a long time, and then some other franchise businesses and food and beverage. Practice and chain hotels, so a lot of consumer driven businesses. So I have that perspective I bring to the table. And I guess my claim to fame is more longevity. I went through the Bank of Boston's management training program in 1995. So that tells you a little bit how long I've been around and virtually since then doing some deals in the restaurant space back when nobody would touch them. And so I've kind of seen it grow and build over time. To something that's weirdly competitive today, actually, compared to what it was in the early days.

That's great. Yeah, for sure, that's for sure. Thank you so much, Nick. What do you? Got Mike, how about you?

OK, 25 years restaurant finance, sale, lease back workouts, bankruptcy work, middle market debt. Owned a restaurant, worked in restaurants, started out as a dishwasher. Proud of that humble start. You know some grease in the veins. And I love this business and folks. Who know me know. I have a. Passion for it. They've been through multiple cycles.

And you know.

That I feel like we got one. Team up here. That we're going to be getting ready for but. I would tell you that. Bank a little over 60 billion in assets. We'd like to think of ourselves as being nimble enough to get things done quickly and the connectivity. With senior leadership. Is great, better than anywhere I've really ever been. To be able. To do the things that we can do where we can punch above our weight and we can commit on larger deals with the larger banks. Gives me a lot of tools to be. Able to get things done. And we have been getting things done and close. Deals one in the first quarter, we're launching A syndication this week. So there are banks out there lending. There are some that are pretending to be lending as a nod to friend up in New England who likes to say that. But we are closing deals and our record reflects that. And so you take some comfort, we're going to be a good resource for you in the future.

Well, thank you. You don't.

Want to get into too many of? Your secrets so quickly. Mike, but I will start calling you Hollywood because. Of his background.

Do you want to start calling him Hollywood?

Nick, look at that man.

I don't know, man.

I mean, look at.

That thing he looks like he's.

Humble dishwasher. Come on.

Ah, come on. Come on. Oh, shoot. Well, you see the little horse. In the background. That's my only design you.

Know what I mean?

But well, honored to have both you guys here. You've got great perspectives you both have. Been in the. Industry a little bit longer than me. Actually, I feel like I'm the old guy these days, but we've all been around a long time. Let's start with the first question. And the first question from the lender survey and you know just take a. Couple of minutes to respond. Why don't we go in the order that we started? You want to just do Nick and then Mike and. I'll just lob. This first one out of here. What's your opinion of the operating environment?

Right now. You know I.

Think we were missing an answer in the survey because there was no answer that said the. Operating environment is great. I think it's. Pretty great right now for to me it's pretty clear we turned the corner at the beginning of the year and I think we all expected to turn that corner. Maybe we were hopeful, but we expected because you know just takes a year or for. The kind of inflation that we saw off of the companies to kind of adjust menu prices and catch up to it. And so that worked. And obviously the Fed was working as hard as they could to bring that inflation down, which has been probably a bit more successful than I think everyone imagined. So a lot of things came with focus really from January 1 started to see. It a little. Bit in December and it's kind of March. Through as far as we can see, the results of our customers and everyone I talked to you through the second quarter and the summer is progressing nicely. I think we've kind of. Teetered on the edge of where price increases start to show traffic decline, but we haven't quite gotten there yet. A little bit here and there, but you know that's not so bad. I mean the prices are up there. I don't think margins are 100%. Of where they were at. Their peak, but they're good enough. And so the business looks pretty good. It's a little bit about. You know how to think about. The next 6 to 12 months playing out, but right now the operating environment. Seems pretty good to.

Yeah, it's an optimistic answer. I like the answer and. I agree with you. Most of the customers that we're working with are doing pretty.

Well, right now, right?

And they have a pretty good year. They don't. It's not like they've got, like in the last 12 months. Look a little different. In terms of the, you know the last. Six months look better, but for sure I'm great.

Yeah, I think it's math really, right. You're rolling off probably two of the worst quarters that I've seen in 25 years in the restaurant space in the first second quarter of last year. You're replacing them with better EBITDA, right? Guys were able to.

What are you saying?

Day 5 and 10% price increases over the past year. A lot of folks got caught off guard in the beginning of. Last year and with. Labor spiking and the cost of goods sold spiking. A lot of folks were left flat footed. I was getting calls from CPA's who managed the. Books for a lot of restaurant franchisees, even in quick service, they were losing 5-6 hundred basis points. And so a lot of that's behind us, it's in the rearview mirror. We all think in terms of trailing 12 months of EBITDA when it comes to valuation or debt metrics and those sorts of things. And if you look back over the. Past 12 months, it. Actually looks quote UN quote normal sustainable, which is the word bankers have been saying for about 3 years now through COVID like where is the sustainable EBITDA. And I think we've kind of. Hit that and Rick. I always point to you as a leading economic indicator in. Our M and. A space, right? And in talking to you, maybe. Three months ago. Things were a little dry. There wasn't a whole lot of phone ringing, I would say, even for myself. In the past few weeks, we're starting to see the log jam break. I sent out a note to like 600 folks just this two weeks ago to announce this and I really do feel like the M and a log jam is starting to break up. There's some good activity, there is a phenomenon of deal scarcity that's occurring where you're getting these outsized. Multiples because there's not a lot of deals for. Sale, but I. Do feel that that's going to start to feed on itself, where sellers who've been on the sidelines for. Or maybe 2 years now are starting to think. Alright, it's time to get out. I always make this joke right? Sellers are learning. To spell capitulate. And talking to another M and a broker recently, last week he said the same thing. The words out of his mouth. Guys are throwing in the towel. They've had enough now. Some of those are the harder brands, right? And they're just want to get out of the business. But this idea that it's time to trade and trying to retire, move on, whatever it may be, take advantage of. A higher multiple before the market. That's starting to happen, and that feels really good. Honestly, from the perspective of a banker as bankers, we have a whole different set of challenges. We'll talk more about later, but I feel really good about the operating environment, inflations down employment. Continues to be. A bit of a challenge for operators, we're. Still not back to where we. Were pre COVID levels in terms of the numbers. Of employees working in this industry, but. For most of. What we focus on, which is fast food, quick service or fast casual, the labor problem has subsided.

That's it.

Yeah, that's great. That's a good answer, right? Certainly see the same thing on our side of the business to the MBA side. Thanks for the comments side. I think you've seen, you know, a recent uptick in business from larger clients. A couple of these. Deals are, you know. People who are financially backed or. By private equity or family office. So there may be small sample size, but we may be seeing that the first people. Coming back to market. Are the financially backed? Franchisees, whereas the smaller middle sized franchisees have not been as eager to do it. At least from our standpoint. That will probably change, but just at this moment in time and that wouldn't make sense to me because. All things equal, and usually the financial buyers are the most savvy in terms. Of timing when they want to.

Get out into.

The market relative to the supply and demand. And they think about that stuff a lot. More than a. 15 unit operator would. For example, so that's great. It's good commentary. The second question is we don't need to spend a lot of time on this, but what do you think? About a recession. You think we're? Going to hit a recession and you think it will be nasty? You want to take it first. Mike and I will jump back to Nick.

So that note that I sent out, I sent to everybody a note about you all need to be watching the. There on Hulu this summer, with an absolutely great restaurant TV, you're going to love it. I think people took it as like TuneIn and watch. The bear was. Like me, I'm not totally. Bearish, but I don't think you can argue with a lot of the facts and the figures and things I've been writing about or talking about for a while. And I sometimes people will say, are you like a broken? You're right twice a day, but at some point, we're gonna hit a recession and a lot of the factors that are pointing us towards that are 15. Months of the leading economic indicators from the NBER have been negative, right? There's 100% correlation with recession. Recessions don't start until after the Fed stops raising rates and. We're about to maybe get more one and done after tomorrow's meeting and that. Might be the last increase for a. Period of time, but. You can look back at history, right. And I would say that, you know, back when Nick and I were in grammar school and studying economics in 1988, you had a 325 basis point increase in rates coming off the stock market crash of 87. Right. So the Fed was taking their money back by 89. People were talking about soft landing the same way they talked about it today. Like they've managed to figure out a soft landing, there's always a lag. It always takes more time than you realize. And you look at 1990, you had a recession between 90 and 95, you started to. Have a commercial real estate. Collapse that affected banks and created a wave of bank mergers. There's turmoil in the months ahead. I started out thinking that this might be a six to nine month peak to through turning the economy, we'd have a reset, evaluations. the Fed would blink and cut rate. My concern is what happened in March with the bank failures and what is evolving into a credit crunch and a number of other economic factors that this could be 18 months of a grind as banks start to realize their commercial real estate losses, their bond books that are underwater where they bought. Funds at low rates today, they're worth less than 100 cents in the dollar. And then, of course, deposits right, which is the headline story for banks. And we've lost. I think it's about 1.2. $1,000,000 which is maybe 7-8 percent of the total deposits in the country have left the building and they've gone to money markets. The money market accounts have gone to T-bills, other sources that is our. Beef, if you will, that is our. Chicken wings, if you will. The price of the cost of our capital has risen as a result. Of that and. We've got to take price to get back to. Where we were in terms of profitability, margins and whatnot. So that's going to evolve, that's just going. To take more time than folks realize and. I know it looks right right now but. I am still concerned about what evolves next.

Sarah, what are you saying, Nick? We need to hop on a. Boat and go off to sail. Off to take a pause for two years and.

Well, yeah.

Come back or what have we got to do here?

I mean first, like I'm not a big predictor of economic cycles because I I just think it's difficult and if I could do it well, I probably wouldn't be talking to you guys right now. I'd be doing something else. It's tough, but just to sort of review, maybe a few facts first, it is the feds stated philosophy that you need to. Have a recession? To an end in inflation cycle, they start with that point of view, right? So they're not getting talked out of that. They've always been that way. And then once the Fed goes on that track, as Mike pointed out, I think since 1950, every episode of disinflation that has been the subject of interest rates increasing has resulted in a recession. So the Fed is undefeated in their record. On that and. Disinflation is different than deflation. Disinflation is simply the slowing of inflation, not going negative right. So we've already had that couple of measures that they focus on. The CPI is running right now around 3:00. Which is a hell of a lot better than 9% where it was a year ago. But still the Fed stated target is 2%. They don't view themselves as successful. Until they're at 2:00. Percent and we certainly haven't gotten there. Yet and we've only been at 3%. For a couple of months. So that's kind of sitting out there as an expectation and you know when you look at the wages and salaries, stuff like, you know, one indicator that I tend to think about is wages and salaries are up 5%, which is certainly. You know in the first quarter of this year, which is certainly half of what it was a year ago, which is great. But whenever wages and salaries outpace the pace of inflation, it's a negative indicator because people are the number one economic input. So people are running more expensive, inflation still has room to move up. And as we've been on this tail with the stock market, right, because whatever was 14 days in a row. Of positive stock market moves because so many people are now feeling like a soft landing is possible, but I think the measures will tell you that, you know, we're not done yet. I don't think that's all bad though you. Know like to me. It's not about like achieving inflation. It's important. For our industry, that inflation stop, we do have to get there. Eventually the industry will be better. Served if we get there and put a stop to the inflation cycle that we're in and restaurant companies have some room to maneuver here. You know, they're generally, I mean we focus on QSR for the most part and it's generally pretty resilient as. A whole? Maybe not. Brand by brand, but it's generally pretty resilient, so it's not the end of the world. Sold to our industry, the Fed is successful and long term it kind of needs to be. So I don't take that as all kind of bad news. And I do think there's some slack. I tend to think about. You know, our operators, and they're sort of wondering about recapturing some margin and some sales even if traffic slows. But I tend to think about. Maybe because I have teenage kids, but. You know, it's those people are sitting on their couch thinking they need to pay 30% more to have fast food delivered so they don't have to interrupt their Call of Duty session. Who might? Have to find out. Whether it's time to get up.

Actually pay for that food.

That's not all bad for our industry, right? It's bad for the delivery. Folks, but it's not bad for our industry. And I do think. There's quite a bit of slack out there. And you know the businesses that we work with, there's more than they've ever been about operating in an environment where expenses need to be managed. There's more technology that they're bringing to bear on those. So I think we're pretty well set up and to me it's just a matter of whether your prediction is a long, deep kind of recession or whether we sort of tag up and things get back on track pretty quickly.

I'm reminded you. Know you guys probably don't know this. I got into this crazy industry because we were in a bad recess. And I was at Vanderbilt MBA School and it was like crickets in the hallway because none of the companies were hiring. This is like at 9. 11 time frame right and a little old. Restaurant company out of Louisville, KY says we come because we do well in a recession. I'm like, really, who are you? And they're. Like we're young brands, KFC, Taco Bell pizza, you know people. Eat that stuff. More when times get a little tighter and that's how I got into the business all these years ago. So went to work for young. So I think there is a measure of resiliency, which is what you're saying that the QSR space especially, but franchising in general, those concepts within franchise. Actually, we're pretty darn resilient. That's what makes them such an enviable type of investment for the right opportunity. Yeah, well, the next couple of questions, guys and maybe we'll go back. To Nick and then to Mike, how? Many corporate borrowers and new customers have you added in the last six months. In the last 12 months, we just combined these two. So running a little bit behind.

We fit solidly in that 10 plus category. We've been on our front foot, I think for six months now, it's kind of seeing that the market was going to. Turn and trying to do business so I think. I wish there was more activity out there. We are in a place where. You got to. See some business results first before the transaction activity picks up. So it's been more refinance, recap, natural maturities coming up, growth expansion, that kind of thing and it's been M&A. But you know we've been kind of solidly. The pace of doing business certainly below the peak of what we saw in deal activity and loan growth and customer growth. Year and a half ago, but it certainly hasn't ended. I think we'll see it come around up in the second. Half of this year.

Yeah, I've seen the same Synovus is new to the.

Space Scott taught. She got here about a year before I did. I've been here a. Little over a year and it's all been a. Lot of new customers, right? So naturally, it's going to be in the higher. End of that scale. And again I've.

I've been kind.

Of proud of. What we've been able to do, which is larger commitments that allow us to participate. At the joint lead arranger level, sole lender relationships, we're starting to lead arrange deals now, so. I feel very good about that, I. Would say that as an industry generally it's been harder to add new customers because you've. Got to kind of pick and choose right. Folks are in the midst of a pre workout or some sort of a modification amendment in order to kind of get through covenant breaches last year, which depress the ability. To pull folks out of other. Banks or move between banks or even consider new acquisitions, right? So I think we had a pretty depressed environment last year. I think this year is. Going to be. Much better, honestly I. Think it's going to be more selective? I probably call it a credit crunch for some segments of the industry. You know, and think full service where they're vulnerable with the cost of a tip or reliance upon delivery that has gotten so expensive, there's going to be vulnerable spots where you're not going to want to take credit risk, not in an environment when overall credit quality is weaker than it has been in the past. As you and I talked, Rick, I wish they would kind of redesign the. Question a little bit more like. How many questions that you had in the last six months and how about the six month prior to that to get? A sense of the trend, maybe. Next year would do something like. That to kind of get an. Idea of what real? Time looks like because I. Do think that as March hit and the first quarter hit. Performance of new loan demand just in general, the Dallas Fed is reporting dramatically near 0 C and I loan growth which is commercial industrial loan growth. And so it's evolving into a bit more of a credit crunch and some of that loan demand folks just aren't borrowing the money. Some of its M&A activity is just way down and acquisitions are down. And uncertainty about what's going to happen next. And so they just haven't. Pulled the trigger on creating new credit relationships.

I suspect for us when we talk. About M&A. Activity I suspect for us that 2000. And 22 and 2023 together. For our company will be. Less than what we did in two. 1021. Like maybe it'll. Be one of these things where it would be 2022 and 2023 1/2 of 2024. Will equal what we did in 2021, for example, and then during that 2022 to 2023 to 1/2 of 2024 timeline you have this kind of like modestly increasing line of activity? So I think. I agree with what you all comments on. Let me ask a question for like the 20 unit operator who has a loan that has a five year term. On it and. He's in year four of his five year term. And he's had it fixed. At 3% interest rate, so what's? It like that or. A girl like that to do.

What are they after? What is their end goal?

You gotta they gotta refinance their debt. Let's say you got a 12 year amortization on a business only loan that had a. Five year term on. It and they owe $15 million, and now they're back is negotiated. Probably thinking about that they're. Going to be making bigger payments. Aren't they quite quite a bit larger payments?

No question. Just fundamentally you know. The shift from Libor to so for. Was really just. A floating rate shift, not a dramatic one, more so the spread that a bank might be looking to. Charge in the future. Is going to go up and I guarantee you the first question to that borrower will be is what is your Treasury business? Look like and. How big are your deposits? Because every bank right now is has. Elevated that to their first question is what is a depository relationship? You know, back in the day when I was. Under before 15 years ago, this idea of compensating balance, you know what? Treasury business, what depository relationship are you going to bring to the bank in order to convince us that we should also make a loan for a full relationship that's become a much more important conversation today. Other factors like terms, conditions, structure. You know, there's been a downshift. You're going to cover some of this in the questions and answers that obviously generally you know, leverage is getting a little. Bit tighter in. Terms of the lease adjusted leverage coming down. 1/4 to 1/2. Turn depending on the brand, amortization may be shortening a little bit. Bottom line is that your mortgage constant, if you will your monthly principal and interest payments are going to be higher. Which is going to eat into your cash on cash returns, which is the way most operators think about, how do I get a return out of this business? It's going to. Be tighter and. So for that reason, you've got to be more scrutinizing of acquisitions and investments. And they've got to have a real rate of return that makes sense. You don't have the luxury of burning equity in your business. By making bad decisions at a time like this.

Wouldn't have you.

Got anything to add? That's good.

Yeah, I mean, I guess back to your original question about, you know, what can a borrower expect in that refinancing scenario that's different today than it was when they did their original loan? So obviously you know the index rate which is now so far has gone from in the low to's to a little over 5% in the last year, right? So that's just more expensive period and that's. There's nothing you. Can do about that for the time being. It will move in a different direction at some. Point in the future and you kind. Of look at it over averages. It's good thing that. This operator you mentioned is hedged some things. Banks aren't always willing to do, but customers should ask because I think it makes a ton of sense is. Looking for hedge products that go out beyond the maturity of their original loan so they can, you know, in those periods of time have a little bit of cushion. There are definitely ways to do that. Not every bank will do that, but there are definitely ways to do that. I think make a lot of sense. But you know, those are the facts. The other issue. Which Mike sort of hit on is that. The nature of the bank world has changed a little bit, has changed in a couple of ways. You do have banks who are looking to charge more of a risk premium because they've just been through a period of time where their portfolios were under strain and they're recalibrating how they think about risk based on the losses. Or the difficulties that they've had in their portfolio, that's very bank by bank, I would say from our perspective, we were underwriting to a inflation reversion risk scenario already which made us miss on some deals, but also made us confident that we would ride through this and have it changed our. You've had underwrites or we're not recall. But some banks are recalibrating but very separately from that, all the banks have to deal with the ever evolving regulatory environment and some things have definitely changed. The banks that I've worked for historically and today have always sat in that category of the largest, you know what we like to. Call the too big to fail. But the ones that sort of. Fit under the higher level. Of regulatory scrutiny. But you know, with this last group of bank failures and these conversations with the regulators were already underway to kind of change some things about the bank regulatory environment to address some of the holes that existed. But very likely the conversations that they're going to increase. The number of banks that fit under that higher level of scrutiny to 700 billion in assets today, and they're going to drop it to 300 billion in assets. Which covers, you know, roughly your top 30 banks. So it really covers the gamut of a lot of those mid. Sized banks that. The folks on the line deal with that will kind of be under that different level of scrutiny. And that scrutiny comes. In different ways, it's. Different capital requirements and especially different stress test. So you know one of the. Problems is sort of. The whole match funding. Problem that is the banking business, right? Can the bank borrow overnight deposits and lend out on five year terms, and how much? Can it do that? Well, you know that's what's getting engineered out of the system. We have to better match fund to our maturity. So and that means we have to borrow longer term, which means we have to borrow at higher rates, which means our cost of capital is going up. So higher levels of capital, different kind of regulatory environment, different kind of stress testing. And more banks having to deal with that than used to have to deal. With that means.

All of.

That has moved. And that's why every bank is looking at their balance sheets and thinking liquidity is. The challenge right now I work for a weird bank because we're overseas based and our deposit structure is a bit different than most banks. So you know it's not. We're more of a safe haven bank when it comes to deposit, the one that has to worry about the stress of deposits moving around. But you know it was very eye opening with some of these bank failures that. How quickly deposits can move and what you have to do in terms of managing your liquidity. So I'm as old as you and I do remember that phrase compensating balances that that definitely ages us, but I definitely hear more and more that banks need to get. You know, some kind of movement so they can manage that loan to deposit ratio, that's. Very important to them. And I think that's kind of here. To stay for definitely a. Period of time because you. Know that bank. Liquidity issue is. In some ways, temporary because of the rate rising environment, but in some ways. Is going to be made. Permanent because of what the? Fat of the regulators are going to do.

Yeah, I'm going to go economic geek on your. So ***** Minsky is a Nobel Prize winning economist, and during the great financial crisis the guys at PIMCO pointed to him as we were in a Minsky moment. Right. And and a simple way. To think about this is that a rubber band can stretch and stretch and stretch, and eventually it snaps. And when it snaps, you have the pendulum swing from one side to. The other and. I feel like what started to happen in March. Was the beginning of that snap. And what usually comes out of situations like that? Is a deleveraging a balance sheets a de risking of their balance sheets not taking more risk, taking less and reregulation so the regulators got caught off guard, so now they're staffing up and they're going to be tightly scrutinizing the banks. Congress is already working on this and you get this pendulum swing. To the other end of the spectrum. Where things were. Super easy and money was cheap to now and it will be more expensive. Banks are going to be asked to increase their capital by about 20%. And I think it's down to. Almost 100 billion they. Want to go back to things that were in Dodd Frank they. Pushed out during the negotiations and I think that's simply going to make it tougher for banks, think about if a bank has to go out and do a secondary offering, this is what happened in Silicon Valley Bank. They went out and tried to raise stock at the same time. They were recognizing huge losses in the sale of bonds. That they had on their books in order. To create liquidity and we know how that. Funded so banks are in a difficult spot where they can't issue equity, it's just going to make it a much tighter operating environment for the banks. We've had 15 years of near 0 interest rates and a whole generation of folks who worked on Wall Street who worked in banks just haven't seen.

In a.

Severe recession that didn't involve government stimulus at the level that it did it. Didn't involve direct payments. You go back to the great financial crisis in 08 O 9 and what occurred then? Tarp and TALF were directed money to the banks that weren't payments made to people. So there's so many things that are changing. That we haven't. Been living under and it's going to just change the environment and so for that reason. You know, find lenders who know what they're doing, who've been through multiple cycles, like Nick and I. And you can calm you and help you navigate those difficult times. We're going to have long term relationships with other lenders at other banks that if you're trying to get a larger deal done 5000, two hundred $300 million deal. That we're going to be. Able to pick up the phone and negotiate with folks we have long term relationships to help get that deal syndicated and. Clear the market. I'm in the middle of syndicating and Nick. You've been through some of this too, you'd. Like to hear your. Comments, but if you're calling other banks today. It's the same conversation. What are the deposits that are coming with the relationship if we're going to participate in a transaction, we need depository relationship, not just the ancillary of a piece of the swap, but really a full relationship and that's making it harder to get larger deals to clear market. The CL market, the term Loan B market, which do much larger EBITDA. Companies they've been on ice for months now, it's starting to loosen up a little bit better, but the paradigm is shifting dramatically and we see it day-to-day. In talking to the other bankers and I know your attendance is very high on this from a number of bankers who are dialing in. So we're all looking for answers. What happens next?

You guys are a sorry lot, man all. You learned is. Just all piling up on the webinar.

On the podcast.

If you're one of those good ones. Like me on the line. Come on, you. Know I'm just joking.

But I get the comment on the experience. Heck, I'm almost 49 now. You know, I used to be the young guy. In this industry now, I guess. I'm in career, but the experience. Like you guys have and I have seen what has happened. Back in the last couple of challenging times, 89 in 2010. And then, you know even. Of two. Or three or four. And these you know. Kind of. The ups and downs cycles. That's important. I believe the Bible study with some. Young men. They're high school boys and I see. And now I'm kind of an interest in the stock market the way I used to have in like 98 or 99. Every Internet stock came out and I thought the stock market would never go. Now you know what? I mean, and so these young boys have not lived through any. You know and. A lot of people. On this phone during. Their 20s and early 30s. I mean, we all looked the. Code but have. Not really seen like a pronounced and prolonged downward trend. Not that I'm saying it's going to happen, but experience in those. Areas is really helpful because. A lot of people just. Haven't seen it in the past. How about we jump into something else like a couple of questions? Here on how about how much is. Your loan volume currently dropping because of rising interest rates are weak credit. And then how? Many deals are you personally. Trying to fund right now. I mean, you can wrap those into. 2:00 and 1:00. What do you think, Nick? How do you answer those two questions?

When you're talking about the time frame, so deal volume, loan volume definitely lower now than it was in 21 when it was sort of peak, I would say probably 1015% would be the perspective from our business, but still.

1010 or 15% down or 80s or.

Year over year over year, I would say 21.

That's not bad.

Yeah, not too bad. But the perspective of our business is probably a little bit. Different because we're. A little bit more in a growth. Mode and we've had pretty. Good volume so far in the first six months. Of this year. But you know, like it does kind of depend on your perspective, right? If you've been spending a lot of time managing covenant defaults and dealing with problem borrowers. You know, you're less inclined to be looking hard at that next transaction. Our business was in a growth mode. So we don't have a lot of baggage of a portfolio that. Was hanging around and doing poorly, and like I said, we kind of managed to an expectation. So we've already seen what we had sort of bounced back. So we're in a good position to go for that. But overall my guess is loan volume year over year is down more in that 20 to 30% range across you know the industry. Sort of. Generally just because of the lack of M&A activity and I might even be a little bit underestimating that frankly.

I'd say that you. Know it was a phenomenon started to happened last fall. I saw it in some of the larger syndicated deals and I went back and kind of peeled the. Onion and you. Find that the top 25 banks in the country had more dramatic decline in deposits beginning last summer and into. The fall as. Rates rose. Money was efficiently chasing the most. Profitable place to. Go to work and it was moving out of. Bigger banks into. Money market accounts and other T-bills, and. Those sorts of things as rates were rise. And so it continued on through the fourth quarter. We're hearing stories with larger banks. We're not increasing on a participation they might have been a meaningful role in or they were actively looking to get out of relationships, you know. Because they it was a lone. Only relationship and you're. Going to continue to hear that sort of. Term and theme as the year grinds on that that's the only part of a relationship. Sir, getting back to the. Old school way of like we are relationship managers. Right, so there's. A bigger relationship. That we want all of. The business that goes with that or some portion of? It in order to participate. It wasn't really until the first quarter that the rest of the banking industry that under the top 25 started to see deposit decline and the acceleration was. Kind of staggering if you think about it, there's something like 16 or $17 trillion of deposits in the US banking. System and to lose what was at. About 1.2 trillion on the last reporting. That I saw and. June hasn't even reported. Yet, but I suspect it's going to be not too far off because the banks that were reporting in the second quarter. Of the past few weeks. Have indicated that the worst of the deposit. Declines seems to have passed. It's behind us. So between the first quarter and the second quarter, it seems. To be kind of flattening out or slight decline. Some banks are putting up positive deposits and so therefore, you know, they're kind of fixing the problem, but it doesn't change the fact that some banks are seeing ten 1415% declines in deposits. Year over year. So that makes a. Dramatic change on how they're going. To do business because deposits, as I said. That's our cost of goods sold. You know, for the operators out there, that's what we sell. We put money to work and if you don't have it available, just like when you can't source chicken wings, the price is going to go up. And if you want to sell chicken wings, you're going to. Pay it, but you're also going to charge more. In order to do that, and so that phenomenon of just it's supply and demand in a different form, it's going to be a theme that continues in the year ahead. As far as. The pipeline and what's coming, there's going to be good opportunities to move folks will get frustrated and want to leave. The bank that's no longer service. And and so that's the advice you should take away from this call is that have as many conversations with as many bankers as you can plan on being there in November in Las Vegas at the restaurant Finance Conference, I suspect we'll have an outsized turn out for operators versus lenders and bankers. It usually flips during times like this. Some folks are looking for money.

Well, Sir, I would think to your point that we're probably near the end of the deposits dropping just frankly because it's been terrible at banks for long enough.

People, if they're going to make. A move and leave.

A bank to go. Chase AT Bill. Or another way to make money with. More interest on. It they would.

Have done it by now.

And if they were scared, like I got a couple. Of calls from buddies of mine who had lots of money, and so. The bank now we just talked to him. One of them's like, just tell me all the crazy. Things he had to do to get. His money out of there like he got it out like 2 hours.

Before it all shut down and.

Just a lot of. That kind of panic pulling money out of small banks, I don't think.

That, yeah, that crisis has ended. I mean, there there were two crises, you know, keep this in perspective or two crises happening. One was the liquidity crisis, and yes, it was idiosyncratic to those four or five banks that were had unique. And the Fed? Treasury, everybody sprung into action and made. It really clear that. We're not going. To have a banking crisis where banks fall apart. You need to pull your money out of banks. This is not the Great Depression. They put liquidity back stops in place where you can borrow against the bonds that you have on your books so you can get 100 cents on the dollar. You can find the liquidity to match when. Money is trying to leave. The bank, I think that's sort of. Panic has ended and I think. Everybody would probably agree with. That the bigger crisis is more the one. That's going to. Be the slow train wreck of commercial real estate losses of a smaller bank balance sheet of tighter credit and scrutinizing borrowers that will feel like a credit crunch. Most folks who know me. I'm very transparent. I don't mix. Words, and I think we're. Going to be facing a credit crunch in a. Recession that will. Make you appreciate your banker. A whole lot more if they can. Get stuff done for you.

Let's take it. Back to franchise in the news for a minute. What are you guys seeing that's happening in the trenches? Specifically on any deals, are you seeing deals being retreaded restructured, are they reaching closing, not reaching closing? Are your risk departments? Going on inside. The inner workings of these deals now. Shops, right? Now maybe Mike. Been back today.

I tell you going into the. End of the year, we fell victim to that a very. Large opportunity that. Didn't get the closing I. Was hearing about other deals you? Had a bid ask. Gap that was too wide and people were getting surprised during their due diligence phase. They'd strike a deal, submit a letter of intent to buy a company, and then get into due diligence and new numbers were showing up and they were showing a negative trend and nobody wanted to catch the falling knife. And so you saw more of that, I think in the third, fourth quarter last year, maybe first. Order, but again, as things started to turn and stabilize and you're rolling off those softer quarters from last. Year and you're putting those behind you. The lapse of those it feels like. That's not happening as often, at least I. Haven't heard it at? Least in the, say, 9000.

Three days.

Occurring, and so perhaps that phase of uncertainty and a gap on you know, the equilibrium of buyers and sellers is returning to something a. Little more normal.

And I feel like.

The rest of the year, it'll. Probably be a lot tighter and just seeing. It real time so you'll know you can tell us right of what's happening. Out there.

Yeah, for sure. And Nikki, I want. You to jump in here too, but I make. The comment that you know a lot last year. We closed a decent amount of. Deals but but.

A lot of them got extended.

You know we. Had to find another buyer. The price potentially in some cases, depending on the brand and the circumstance, had to change. You know, maybe a time or. Two, the real estate. If it was owned by the franchisee was held back because the real estate market, the 1031 market wasn't strong at the.

Moment, you know.

There's just a little adjustments. That were made the deal. The volume drop, but yet at the franchise oil level we saw franchise was taking at least a ton and 1/2 is long, sometimes double the time to approve the transaction even when they have 10% of volume at their desks that they had in the last couple of years. This summer though and I went from spring to the summer. And kind of felt like. You think about rocky and like rocky sleep, right? Remember, rocky? Like he's kind of, he's prominent, he's down and out. You know he. Apollo Creed comes. At him, right. And then he starts the train and he's hanging his lip, goes out to LA, and then he starts, right.

And he gets a.

Little momentum and he's getting in shape. I feel like that's kind of happening in our. Transactions like I feel like. They're billing strength and confidence. I don't hear buyers and sellers bickering so much in the trenches of like P&L updates and and issues and concerns. You know some of the legal points aren't quite as prickly as. So I kind of would agree with that, but it. Feels to me a little like. We're on a little more solid footing from an AMA standpoint for deals transacting between buyer, seller. But what do you think, Nick, you got?

Any comments on all of that?

Yeah, I can't say that I've experienced deals falling apart. We haven't worked on anything that fell apart recently. But you know, I would just say in general, the observation that I have is whenever you have periods of volatility where your historical trailing performance looks very different than your future predicted performance. You have a hard time. Bringing buyers and sellers together in both directions, right? You know like. When you're coming off of a great quarter, your sellers want to run, right the crap out of that, right? So and your buyers want to look at? What would you? Do three years ago pre COVID, that's what. I'm looking. At and now we're. In a period of time where the buyers really want to look at trailing numbers, right, because there's still six months of really. Not so great performance in there, so they know they're on the upswing, but I think it's time for sellers to start saying it's run rate this. And you mentioned before like like you mentioned that you think. Leverage it's coming down. That may be true for some banks. It's not true for me. I'm comfortable moving leverage up, particularly when I'm underwriting off of a trailing number today, because I don't think that's very representative of future performance based on what we see in the run rate today. So those kinds of things move around. I think it's the judgment around how to put the historical and your future. Prediction into some sort of context when those things come into a more stable alignment, buyers and sellers tend to agree they reach a price and they stick with it and deals close. And those things are really far apart. It doesn't tend to work out that way, and things get moved to. Ground and recut as every new month comes in, and either it's going up or down right. So I think that's just been the period of time we've been in, but. That's going to start to even out.

I think it was a good. Point that I you know, I hadn't heard much before, which is you're comfortable looking at the past, you know, and maybe not dropping your coverages and. Your ratios because the trailing 12 months has a component. Of poor performance in it. Right. And so that's. At least on a relative basis, I mean, there's.

But we all know, yeah, we all know. Like, it's just sort of nuts to expect when pay your cost of goods when 15% this month.

Nothing like.

Why didn't you raise your prices 15% this month? Like we all know, it doesn't work that way. It's got to take a little time. So putting that into some sort of come. Context but it. Works both ways. I mean you're anomalies. Mike, you brought up. The issue of chicken wings, right like chicken wings.

Ringside wing stop, like Wingstop, is anomaly.

Yeah, I mean. I mean, it's a great business, right? I mean, it's been great, but if you're underwriting, you know, chicken wing based on the idea that it's going to stay up at all time low, not revert to a normalized at least historical average. That's nuts, right? It's all about trying to figure out what have we been through. But what is the norm and how do? We kind of. Expect to get to that norm and over what period of time. That's what we have to under right too. I think generally speaking.

And the Wingstop deal with that brand. In particular, we just closed a 20 Wingstop transaction and you're seeing like 10 to 15% sales increases every single period over last year. Some of its some of its demand, transaction growth and some of it is pricing and then you're seeing the price of wings drop like 600 basis points or 6%?

Half half year over year.

Yeah. When? You know.

I mean, and all of a sudden the EBITDA like of a business might go from like 3 million to like 8,000,000 like RAM like this and I'm like what am I in here? Am I like in a software business like is this?


Google, you know what's happening here, you know?

Yeah, yeah. Not to overly focus on wings, it just happens to be one of the commodity anomalies today. But any kind of dependence on a particular commodity, that's Volt. That's all just happens to be chicken is fairly volatile, right? Because of the gestation period. So you know, prices are low, they correct to high. Again, prices are high. They correct to low like it's just sort of very predictable and not particular realm. So you know you just have to pay. Attention to the stuff.

We just have time for probably one more question each maybe.

Or maybe 1 1/2 I don't know.

What do you like? You know, on the line here. We're going to have, you know, I think I told you guys before you're going to have midsize operators. You have large operators, you have private equity funds, family offices and small operators. Everybody in between.

What do you?

Like in terms of. The types of loans you want to make for the next 6 to 12 months. What types of segments and what advice? Would you give broadly across the board? To all of those clients, if you could. And if you wouldn't? Bank them. Sorry, nick.

And then in with.

Mike, come up then.

Yeah, I've never. Taken the point of view that I see a lot in our industry of like, I'm going to pick and choose the three brands I like and only do that right? What I've observed over time is they're good businesses, good operators across a very large number of brands. And you can find good transactions, you just may have to adjust certain things, right, like you have to think about the enterprise values are always going to be more elevated in a big national brand because they're just more buyers. It's a more active buy and sell market than maybe a more regional smaller brand. They're adjustments like that, but I don't really rule anything out. In that sense, like, I just don't think that makes sense. And I frankly find the beauty of managing your portfolio across the industry is getting some diversification because all brands go through cycles, even the best ones. I think you know you have to kind of be. Prepared for those ups and downs and frankly like I love underwriting good operators and historically good brands going through a bad cycle. It's a lot easier. You know, everything looks good when it's good, right? And you know, a lot of really mediocre operators and businesses look good when everything's good. But it's when the times are a little. Bit tougher that you can. Kind of see and pick out the quality out there. So I find you know, just from a credit underwriting standpoint, that's easier is to sort of figure out and I like catching a brand. On a cycle when you know like times are better in the future. So I think I kind of look at that differently than a lot of banks where they're just like we don't do this. We don't do that when we do these. And I just don't think that's the right approach generally.

That's great feedback. I would say even. Though I think. Financial buying community will continue to grow within the franchise space. You know just will. I do think all of us, including the franchisors when there's everybody really are kind. Of doubling down on. Good boots on the ground. Hands on operators. I mean, I think we all like that type of person. We've some franchisors are publicly saying that they don't want large absentee, financially backed operators in their businesses. And that's something I haven't. Heard in quite a few years. So when times do get tough, usually the person with experience who knows his or her. Business and knows the employees and knows how to operate. It In store is the type of person who's going to come out smelling like roses. Do you think, Mike?

You got a.

Quick minute half here and then we'll end up.

Yeah, yeah.

For all the dark clouds, there's Silver Linings. They're always are. I've been doing it for 25 years if. I was that. Dour, I'd give it up. But at times like this. Are really when QSR shines right and fast casual and people do trade down. And I do like. The fact that the restaurant industry. Is all about small indulgences, and some you'll spend. More money when you got more money. And you go find dining. You'll get a big steak, do upscale casual. Other times. It's like, you know, I worked a double and. I just want to get some. Well, and it's that simple and I think. The idea of rewarding yourself with a restaurant. Experience is something that makes this industry kind of magical. And I love it. Even during the dark Times, people will continue to go to restaurants. And So what do you do? You pursue the safer bets, right? We're a bank. We're not in the business of taking equity risk for senior lender returns. And you got to be careful with that and some banks will take that risk and they usually get burned and retreat and so. There's going to be a period of. Time where lenders. Are moving away from this space and. That creates more opportunity for. I like that fact. We like real estate. I've been able to do a number of larger. Real estate transactions now. And you can. Say well, my gosh, you're dollar on commercial real estate, not triple net lease restaurant properties that are in the fast food business with the drive. Though their cap rates are still low, investors still like those businesses. And the dynamic of principal and interest costs, you're not over leveraging yourself because these are businesses that are built on a operations essential business. You've got to have those four walls to do your business. And so that's a great place to put money to work and we've. Been pretty effective on. We like all size deals I. Mean we do this small as. The McDonald's operators, we'll do some of the largest private equity family office back transactions. We will write bigger checks for the right situations, but I would be lying if I told. You that it's. Going to be a tighter Crucible, much more difficult. The writing process today than it was in 21. I think every banker on the line. Will tell you that. And so I think that, you know, finding a banker who's been through a number of these cycles, right, who can be your macroeconomic advisor, who can help be your outsourced corporate finance guy with different structures and deal insights and those sorts of things.

These are the times when.

I get most excited because that's when the. Phone will ring and like. You know you're talking about. I've seen this before. What should? I do now what? Do you think and? That's when I know I'm doing a good job is when folks are calling up and. Say every time I talk to you, I learned something new. Right. And so seek out those situations. It's going to be bumpy. There's no getting around the incredible economic experiment we've just conducted by putting 8 1/2 trillion dollars into this economy. Now vacuuming it back up out of it. And that's going. To create all sorts of volatility and problems. But it also creates. Opportunity and that's when buyers understand that this could be once in a lifetime kind of buying opportunity. So make sure that you have strong relationships with your bankers. Make sure that you can finance deals, and if you're not going to get every last nickel of leverage today, understand it might be a year or two from now and you could recap out when you've made that. Exceptional acquisition and the markets have more normalized when it comes to credit. That'd probably be my insight.

That's a wrap for it, gentlemen. I really appreciate it. Both of you guys. Excellent job today.

Thank you.

We all three of us have staked our career and our future and our heart and soul. I know I can speak for myself, probably for. These guys too and this. Beautiful industry, the restaurant industry, the franchise industry, it's. Like everything I know.

And love every day I wake up.

What I want to. Do so. We're in it. We were, we were. A little anxious, but probably excited a. Little bit too for. The future, I think. M&A, we'll pick up in. The second-half of the. So they'll be some things coming. So stay tuned. Thanks again for everyone who listened and tuned in, gentlemen really appreciate. It and you guys did a great job. And we'll see you in November if not. Before you all take care, OK?

Take care.

Thank you all. Thanks so much for entering the boiler room today. You can find our podcast on iTunes, Google Play, Stitcher, TuneIn and Spotify. If you like these podcasts, please listen, rate and review. I also encourage you to visit our website at for the best franchise, M&A and financial resources in the industry our website. Includes webinars, podcasts, videos, white papers, and a list of our past M&A transactions. Please note that neither Rick Orms being nor Unbridled Capital Advisors LLC give legal, financial, or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information. Errors therein, or emissions therefrom.