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The sudden bankruptcy of restaurant group FAT Brands, whose whole-business securitization noteholders allege its controlling shareholder misused funds, highlights the plight of investors who may have hoped this structure would protect them.

Coming hot on the heels of last year’s First Brands implosion, it also shows the heightened risk of standards slipping in hot debt markets where investors are under pressure to deploy cash.

Whole-business securitization has become increasingly popular among franchised restaurant groups over recent years, often enabling them to take on more leverage at lower interest rates than in the leveraged loan or HY bond markets. The likes of Subway, Domino’s, Taco Bell and Wingstop have all done whole-business deals in the years since 2022.

FAT Brands used the structure to finance a string of restaurant acquisitions between 2017 and 2023. The company now owns a slate of popular names like Fatburger, Johnny Rockets and Twin Peaks.

Whereas traditional ABS structures package pools of specific assets, such as consumer loans or accounts receivables, into debt investments, WBS deals package up entire businesses. Essentially, a company can take major business segments that generate positive cash flow and turn them into bonds.