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    Fitch Study Paints Grim Picture of Industry

    Ratings group says developing trend of franchise loan defaults among convenience store chains "troubling."

    NEW YORK -- The collateral default storm for franchise loans has resurfaced after two consecutive quarters of relative stability, according to the latest Fitch Ratings Franchise Loan Performance Index. Impaired franchise collateral rose 23.6 percent to $1.37 billion of approximately $7.2 billion outstanding during the third quarter 2002, due in large part to the developing trend of borrower defaults within the convenience store and petroleum marketing industry.

    "The bankruptcy filings of Swifty Serve Corp. and Clark Retail Enterprises Inc. comes on the heels of several failed [convenience store] operators employing a debt-financed, growth-by-acquisition strategy," said Warren Wells, associate director of Fitch Ratings. "The C&G sector accounts for more than 65 percent of the current level of impaired franchise collateral. The convenience store and petroleum sector also has a higher default frequency rate than other franchise segments, and a considerably smaller recovery value compared to restaurant collateral."

    With cumulative defaults of approximately $2.1 billion and more adverse rating actions expected in the near term, there is an increased focus on special servicing and the quality of workout efforts to mitigate losses to investors. "Fitch expects continued franchise ABS performance concerns and accordingly more adverse rating actions to occur in the near term," Wells said.

    The Fitch Ratings Franchise Loan Performance Index is a quarterly index that charts delinquencies and defaults within the franchise loan sector, using data culled from Fitch's extensive database of franchise asset-backed securities (ABS) collateral performance. To view the index, visit www.fitchratings.com.

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