Washington Mutual Inc. on Wednesday said it would purchase up to $5 billion of business loans from Franchise Finance Corp. of America, a commercial finance company in Scottsdale, Ariz.
The Seattle thrift holding company said it had agreed to a three-year strategic alliance with Franchise Finance that would let Washington Mutual add higher-yielding loans to its books.
"Our strategic alliance with FFCA creates an effective avenue by which we can accelerate the diversification of the mix of loans in our portfolio," said Craig Tall, vice chairman of corporate development and commercial banking. "Their expertise in single-tenant retail property lending provides Washington Mutual with a tremendous opportunity to add high-quality, high-yield assets."
The loans are to some of the nation's leading fast-food restaurants, convenience stores, and automotive service shops. Buying them is part of Washington Mutual chief executive Kerry K. Killinger's push to give the thrift company a balance sheet more like a commercial bank by focusing less on large acquisitions and more on higher-yielding loans.
"Washington Mutual has a voracious appetite for higher earning assets, and this is a solid, highly attractive lending area," said R. Jay Tejera, an analyst at Ragen MacKenzie Inc. in Seattle. "This is a nice plus for them."
The deal also gives the $180.8 billion-asset company an option to take an ownership stake in Franchise Finance. Warrants for 2 million shares of the finance company were issued to Washington Mutual. Though that would amount to only 3.6% of the finance company's 56 million shares outstanding, a stake that large would let Washington Mutual take part in the success of Franchise Finance, said JoAnn DeGrande, first vice president of investor relations at the thrift.
"The warrants allow us to purchase stock and benefit from any future earnings growth in the company," Ms. DeGrande said.
Under the agreement, Franchise Finance would receive fees to originate the loans and would retain servicing rights. The deal would allow the finance company, which makes real estate, construction, and equipment loans to retailers such as Burger King, Midas Muffler Shops, and Pizza Hut, to continue growing while lessening its reliance on the volatile capital markets for funding.
Through Sept. 30, Franchise Finance had originated $1.2 billion of commercial loans in 1999 and had investments, including interests in securitized loans, in roughly 5,200 properties in 48 states and Canada.
Separately Wednesday, Franchise Finance announced that it would repurchase up to 7.5% of its outstanding shares and raise its quarterly dividend 8.2% to 53 cents per share. The dividend is payable on Feb. 18, 2000, to shareholders of record as of Feb. 10.