Arash of bankruptcies and unit closures in recent months is evidence not only of the difficult operating environment, but also of the tight-fisted lending atmosphere, which today is making it more challenging than ever to restructure debt or to obtain needed financing.
Sources say operators in trouble must open the lines of communication with their lenders or shareholders immediately, as any type of modification to loan documents or forbearance agreements is typically offered within a narrow window of opportunity.
“The key is communication with everyone,” said Holly Shilliday, a Denver-based attorney who has represented lenders and franchisors in franchisee default situations. “If you’re going to turn [operations] around…[the operator] must let the lender know what the game plan is to change things.”
That plan of action also must be one that lenders or shareholders find doable. Without that commitment to a realistic plan, lenders will be looking for an exit strategy—and that often means selling the business.
“Most lenders may work with you in the short period,” Shilliday noted, “but most often they want to get paid in full when there’s a problem.”
After such large companies as Buffets Holdings Inc., parent to the Ryan’s, Old Country and Hometown chains, and Vicorp Restaurants Inc., parent to the Bakers Square and Village Inn chains, filed for bankruptcy protection a few months ago, the industry has seen a flare-up of smaller operators buckling under today’s pressures. Those smaller operators are not saddled with large levels of acquisition-related debt, but instead simply can’t make ends meet.
Sam Seltzer’s Steakhouses of America Inc., a nine-unit chain based in Tampa, filed for Chapter 11 bankruptcy protection last month and cited its inability to service debt from a previous expansion push and a lack of sales from the consumer fallout. A 15-unit Church’s Chicken franchisee also recently filed for Chapter 11 protection and closed three unprofitable stores. The flurry also includes Midon Restaurant Corp., an Albany, N.Y.-based franchisee of Rock Bottom Restaurant Inc.’s Old Chicago brand, which filed for Chapter 11 protection last month.
Navigating today’s environment isn’t easy, and securing additional financing after trouble sets in is especially hard. In those situations, “lenders are not refinancing; they’re mostly seeking…help in finding someone else to run that business,” Shilliday said.
Trey Brown, senior managing director and commercial leader for GE Capital, said his firm, one of the largest lenders in the restaurant space, works to partner with good operators, even in sour markets.
“We look for companies that are three steps ahead of the market pressures of the day,” he said.
His point underscores the difficulty an at-risk company may face when capital is needed and the business isn’t shored up.
Still, Brown said the mid-cap lending market is healthier today than the large-cap market, mainly because restaurant management teams at smaller operations are more vested in the company’s success and making a smaller deal is a simpler affair as less capital is required and the number of lenders needed to amass it is smaller.
“Larger companies require larger amounts of money, $100 million plus.” Brown said. “But a good mid-cap company with a good track record can club up a smaller capital amendment or recapitalization with just two or three participants.”