Restaurant growth may suffer as GE slows new lending

GE Capital Solutions, Franchise Finance, the largest restaurant lender by assets and clients, confirmed Friday it would be “much more selective” and defer rate quotes on new deals as the credit chill that began last year becomes a freeze in the face of Wall Street uncertainty.

GE Capital spokesman Stephen White said that while the Franchise Finance division was still active in the restaurant industry, it would continue to quote deals only “where competitive and appropriate.” GE also said it would honor any existing arrangements.

“We are being much more selective and have raised our hurdle rates, which has slowed deal approvals,” White said. “We’re still active -- less so in the last two weeks -- and are simply taking more time as the environment settles.”

He added that GE Capital would cease providing rate quotes “until things settle down,” but it would continue to accept credit packages.

According to lenders, operators and industry analysts, almost all financial institutions are re-evaluating their lending positions in the face of the credit crunch and the uncertainty surrounding a bailout plan for embattled banks on Wall Street. The situation, while changing daily, does guarantee a higher cost of capital, less available leverage and tighter lending structures for operators that need funding. It also could have a dramatic effect on the restaurant industry’s growth plans, which rely heavily on franchise activity.

GE’s decision to re-evaluate new restaurant lending comes on the heels of Bank of America’s alleged pullback on new lending to McDonald’s franchisees for upgrades surrounding the chain's espresso-based beverage initiative. McDonald’s Corp. spokeswoman Heidi Barker said Friday that Bank of America is “currently making new loans and continuing to lend to McDonald’s franchisees,” despite previous reports that had suggested the contrary.

With the banking system so unstable, industry sources have indicated that it is likely some restaurant companies may be unaware of changes to lending relationships because of the day-to-day unrest with the credit markets. Bank of America is in the midst of a merger with Merrill Lynch, another restaurant lender, and restaurant securities analysts proffered this week that any pullback in lending at McDonald’s or elsewhere could be based on the two banking institutions evaluating their portfolios. No one has suggested there is a credit issue at McDonald’s, and corporate spokeswoman Barker added that the company and its franchisees have access to more than 50 lenders.

Still, the reports of recent pullbacks at two main restaurant lenders are "disconcerting to say the least," said restaurant securities analyst Sharon Zackfia at William Blair & Co.

Both the International Franchise Association and the National Restaurant Association, which says 70 percent of the restaurant industry is comprised of independent franchised operators, have called on Congress to enact the proposed $700 billion rescue package that is expected to provide liquidity to the nation’s financial institutions and kick start lending and economic growth.

GE Capital, which holds more than $100 billion in assets, is feeling pressure from parent company General Electric Co., which said this week that it would shrink its entire GE Capital unit and curtail borrowing at the division for the rest of the year. The Franchise Finance arm boasts more than $13 billion in served assets.
The lending freeze could curtail not only new unit development, but the refranchising plans of major franchisors who have counted on the sale of corporate locations to franchisees, deals that typically require outside lending, to shore up near-term corporate revenues and earnings.

Companies undertaking refranchising initiatives include Sonic Corp., Yum! Brands Inc., CKE Restaurants Inc., Jack in the Box Inc. and DineEquity Inc. Companies that have said future growth will come more from franchised development than from new corporate units include Panera Bread Co. and Buffalo Wild Wings Inc.