Panel: Capital plans get creative

DALLAS —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

From boutique lenders to phantom equity to reclaiming cash from your landlord, restaurateurs can find funds if they are willing to pursue less traditional venues, agreed participants in “How to Get the Financing You Can Afford: Tips from Insiders.” —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

“It’s a bad news-good news story,” said Nick Cole, executive vice president of Wells Fargo-Restaurant Finance. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

Unfortunately, the number of healthy traditional lenders has shrunk considerably, taking with it capital from the market, Cole said. From Jan. 1, 2007, to Sept. 4, 2009, the base of traditional lenders has dropped from 23 to 17, with a market cap of about $2 trillion to $1.05 billion. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

At the same time, the cost of funds has risen for everyone, including banks, default rates have increased, and the number of loans trading at distressed levels remains high, Cole said. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

On the plus side, the market is flooded with money from the federal government, and market conditions appear to be returning to normal, Cole said. Among the positive signs, larger companies are pricing bonds in the 9-percent range and restaurant stock indexes are returning to more typical levels. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

As operators wait for the credit markets to thaw, private-equity funding can be an attractive alternative for concepts that are looking to grow, said Steve Romaniello, chairman of Focus Brands and managing director of Roark Capital Group. Atlanta-based Focus operates or franchises nearly 2,200 locations under the Carvel, Cinnabon, Schlotzsky’s, Moe’s Southwest Grill [3] and Seattle’s Best Coffee brands. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

In partnering with a private-equity firm, operators not only attain capital for growth and often maintain their management roles, but they can benefit from the firm’s relationships with other companies and advisors, Romaniello said. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

Romaniello noted that private-equity firms have different investment focuses, and that Roark looks for companies with earnings before interest, tax, depreciation and amortization of $5 million or more. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

At Petrus Brands, the Atlanta-based franchisor of the 74-unit Shane’s Rib Shack and 125-unit Planet Smoothie chains, officials are looking to leverage the soft real estate market by buying distressed assets and amortizing build-out and equipment costs. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

“We find we can get in for operating capital,” said Chris Morocco, chief executive of Petrus. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

Morocco also noted that boutique lenders, although more expensive than traditional lenders, can be a good alternative source for funding. He added that more recently Petrus has put in place an operating-partner model, where its operators can buy an equity interest in a restaurant that is majority-owned by Petrus. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

“We’re looking at doing it outside of our system,” Morocco said, noting that there are private investors looking for less traditional investments. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

Along the same lines, Allan Hickok, co-chief executive of Wayzata, Minn.-based Redstone American Grill, operator of five casual-dining restaurants, said his company is looking to phantom equity as a way to fund growth in 2010. In such arrangements, investors who have cash but lack restaurant experience foot the bill for new units that Redstone manages for a fee. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

Another way to access cash is by reducing occupancy costs, said Bridget Grams, principal with Huntley, Mullaney, Spargo & Sullivan LLC, a company with offices in California and Illinois that helps clients with lease and debt restructuring. Unlike cutting food or labor costs, shrinking occupancy costs has no negative effect on customers, she noted. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

Grams noted that what you ask for when renegotiating lease obligations is very important. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

“Ask for what you need to solve the problem,” she said. —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.

For negotiations with landlords to be successful, Grams said, operators need to have concrete and site-specific evidence pointing to distress and illustrate how changing the lease size and terms can rectify the situation.— [email protected] [4] —Despite the continuing deep freeze of the credit markets, operators still are finding creative ways to secure capital when they need it, said financing experts during the 50th annual Multi-Unit Foodservice Operators conference.