Butterfly-backed QDOBA closes $305m securitization

Butterfly principal Francesco D’Arcangelo says consumer shifts from fine dining into Mexican fast casual has helped put the chain in a position to carry out the only inaugural such issuance of the year.

Butterfly Equity-backed QDOBA restructured its debt through a $305 million whole business securitization, which was partly facilitated by a fall in fine dining consumption that benefited the fast-casual Mexican restaurant chain.

Butterfly principal Francesco D’Arcangelo told Agri Investor the volumes for whole business securitizations – in which investors are offered exposure to royalties paid to franchise owners – have come down meaningfully this year. The buyers for these types of securities, he explained, often include large institutions with established portfolios of asset-backed securities.

“QDOBA marked the only inaugural issuance of the year, which achieved really meaningful excess debt capacity and interest rate savings relative to what our prior facility was, which was a non-investment grade debt. Historically, there have been a ton of issuances of these products, but with the rise in interest rates, this market has dried up,” said D’Arcangelo. He joined Butterfly in 2019 after holding positions at Apollo Global Management and L Catterton, according to his LinkedIn profile. “We’ve been performing so well that we were able to tap into it and execute the transaction.”

The Los Angeles-headquartered Butterfly Equity worked with Barclays Capital as structuring adviser in a transaction carried out through Qdoba Funding, which will also support QDOBA’s expansion beyond its 750 North American locations.

D’Arcangelo said the securitization enables QDOBA to be viewed as an asset-lite business model and will result in $7 million in annual interest savings. He explained that $305 million represents total debt load for Qdoba and the securitization consists of one $65 million revolving variable funding note and another line $240 million fixed-rate note, the interest rates of which he declined to share.

“The combination of those two is significantly lower from a cash interest perspective, versus getting a traditional debt loan through a bank,” he added.

Franchise model

Butterfly acquired QDOBA in 2022 through a transaction with funds managed by Apollo that included a merger between it and Modern Restaurant Concepts, a platform containing existing portfolio restaurant companies Lemonade and Modern Market Eatery. D’Arcangelo, who worked on QDOBA as a senior associate at Apollo, according to his LinkedIn profile, said the company has shifted from a 60 percent to an 80 percent share of stores owned by franchisees since its acquisition by Butterfly.

“A franchise business model is by nature more diversified and those royalty streams you are collecting from franchise partners can get pooled,” he said.

The Mexican fast-casual restaurant market has remained very strong, despite a challenging overall backdrop for foodservice, D’Arcangelo added.

“If you look at casual dining, or other segments within the restaurant space, those are all down this year as consumer sentiment has gotten worse. However, folks have traded into fast casual, and specifically Mexican fast casual, for its convenience and general tailwinds – a combination of the Hispanic population in the US continuing to increase and then fast and convenient, but also flavorful foods being a big value-driver for the business,” he said. “Fine dining and casual dining in a recession or in a macro environment that becomes more challenging, those are the ones that feel the biggest burn. Fast casual and QSR, quick service restaurants, are typically the winners in the space.”

QDOBA’s long-term plans call for an expansion to up to as many as 1,500 locations.

“We see so much opportunity in the Southwest. You could argue there is also a tremendous amount of opportunity on the West and East Coasts as well,” said D’Arcangelo. “Over the next couple of years, we’ll get to a level where we will at least be opening 100 units per year.”

KKR-spinout Butterfly closed its sophomore fund on $1 billion last year, and last month secured an investment of an undisclosed size from Equilibrium and an unnamed US pension into portfolio company Pacifico Aquaculture.