Fitch: Negative Outlook for C-Stores

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Fitch: Negative Outlook for C-Stores

CHICAGO -- Despite some signs of stabilization during the first half of 2005, gas price increases and volatility and the accompanying economic uncertainty may further exacerbate an already problematic U.S. franchise loan asset-backed securities sector for the remainder of 2005 and well into 2006, reported Fitch Ratings, according to Business Wire .

Increased pressure on convenience and gas operators may ultimately result in higher incidents of default on their franchise loans, according to the report. Recovery rates on current and future defaults will also likely be hampered by continually adverse economics at the operator level, Fitch Senior Director Joseph Tuczak told Business Wire .

"Lower than expected recoveries on defaults will make transactions with already eroded credit enhancement more susceptible to further credit rating action," Tuczak said in the Business Wire report.

In the convenience and gas segment in particular, Fitch remains concerned about operator profitability in an environment of high and volatile gas prices. Operators will be stressed by price volatility, potential shortages until Gulf of Mexico refinery production returns to pre-hurricane levels, and by consumers trading down from premium to regular gasoline, which combine to make managing margins more challenging Business Wire reported.

Jay Ricker, president and CEO of Ricker Oil Co., previously told CSNews Online that people are not spending as much money at the pumps. "I believe people are coming to fill up more frequently, but spending small amounts each time," he said. In addition, Ricker said that sales on premium gas declined drastically.

According to the report, higher gasoline prices may also negatively affect in-store sales of convenience items, which generally have higher margins than gasoline and account for a majority of an operator's profitability. This sector may also be negatively affected as consumers increase their gas purchases from super centers and warehouse clubs which typically set their gas prices below local gas competitors.

"Consumers may also utilize these venues for future purchases of discretionary and convenience items as well," Tuczak said in the Business Wire report.

Additionally, consumers are more inclined to use credit/debit cards due to higher prices and in response to more operators requiring customers to prepay due to increased theft potential. The resulting increase of paying at the pump results in increased transaction processing fees that further cut into an operator's profitability and will also hurt in-store sales of higher margin convenience items, Business Wire reported.

"There are concerns that prepay mandates could lead to more cash customers deciding to pay at the pump by credit card, instead of going through the hassle of going inside the store to prepay," Jeff Lenard, a spokesman for the National Association of Convenience Stores, told CSNews Online . "The concern for retailers is that you don’t want to switch over cash customers to credit, since retailers pay upwards of 3 percent in transactions fees for credit cards, leading to fees of up to 9 cents a gallon that they don’t pay for cash customers."

While gas prices can be expected to decline as refinery and production output levels return to prior levels, the timing and size of any decline is uncertain, further stressing restaurant and C&G operators who were already competing in economically challenging environments. Fitch's Outlook for U.S. franchise loan ABS performance remains negative, according to Business Wire .

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