A bankruptcy court judge on Thursday approved a deal between the restaurant chain operator Fat Brands and its lenders that will finance the company through bankruptcy while addressing concerns about its management in the meantime.
In so doing, the company ended months of often-acrimonious negotiations between the owner of Twin Peaks and the investors who bought bonds that funded Fat Brands’ brief emergence as a major restaurant chain acquirer in 2020 and 2021.
The debtor-in-position, or DIP, financing deal is valued at $184 million, including more than $46 million in new money.
That financing is largely coming from the lenders and is designed to pay for the company’s expenses as Fat Brands works to sell its different restaurant chains.
Without the financing, Chief Restructuring Officer John DiDonato said in a court filing, “the debtors face the prospect of administrative insolvency and subsequently a potential dismissal or conversion to cases under Chapter 7 of the bankruptcy code. In either scenario, the debtors would be unable to pursue a going-concern sale process, and the value available for distribution to creditors would be pretty severely depressed.”
To get the financing deal, lenders wanted a change in governance. Throughout the bankruptcy process, the continued involvement of CEO Andy Wiederhorn and members of his family was a major point of contention.
DIP financing is usually agreed to early in a bankruptcy process because it's often crucial to ensure a sale of a company at its highest value. But Fat Brands is anything but a usual bankruptcy, and this one has been particularly acrimonious.
That contentious nature dates to well before the bankruptcy was filed. Lenders sued the company multiple times, including once after the Chapter 11 action was filed. They initially requested a trustee be appointed and later sought to have Wiederhorn suspended after an unauthorized sale of Twin Peaks stock after the filing.
Lenders have accused the Wiederhorn family of treating Fat Brands like a “piggy bank,” citing among other things a $47 million loan to the family that was forgiven and became the focal point of tax charges that were later dropped. They also cited retention bonuses and raises given to two of Wiederhorn’s sons.
The lenders ultimately got what they wanted. Wiederhorn will take a leave of absence until the case is effectively resolved. His three sons will be terminated. And much of the Fat Brands board—which is loaded with various Wiederhorn relatives—has also been dismissed.
The family will be “walled off” from any corporate decisions. And as an incentive, Wiederhorn is being paid $5 million, including $3 million up front and another $2 million in various increments. If he violates the provisions of the deal, according to court documents, those payments stop.
Wiederhorn will still be able to bid on the chains and, as we said earlier this week, we expect him to emerge with at least some of these brands.
Now, Fat Brands gets some breathing room.
The company had $1.5 billion in debt from those securitizations and its financing efforts to keep operating more recently. That debt burden has made life difficult for a group of chains that are mostly in decline.
DiDonato in his court document described an increasingly difficult financial situation for Fat Brands. He noted that the bankruptcy process has added more administrative expenses. “The debtors have been operating with constrained liquidity for a prolonged period of time and are incurring administrative expenses in connection with the Chapter 11 cases without an attendant reserve,” he said. “This practice is unsustainable.”
But he also said that the uncertainty has put the company into a “precarious position” where management doesn’t know whether “they can rely on the continued provision of goods and services critical to their operations.”
“Instead of being able to fully focus on improving the performance of the debtors’ businesses,” he said, “management and employees are frequently forced to address, among other issues, vendor grievances and potential supply chain disruptions.”
Now they can be distracted by who will own the company in two months.