Checkers, citing inflation, looks to refinance its debt

The operator of drive-thru restaurants has reportedly hired advisers to help it restructure its debt, which comes due next year.
Checkers refinancing
Checkers is looking to restructure its debt, citing the impact of inflation. / Photo courtesy of Checkers.

The parent company of Checkers and Rally’s, whose debt comes due next year, has hired an adviser to explore a refinancing.

Bloomberg reported this week that the company, owned by the private equity firm Oak Hill Capital Partners, has hired the investment banking firm Miller Buckfire & Co. to help it deal with its debt.

The company confirmed that it is looking at a refinancing in an email to Restaurant Business on Tuesday. It cited rising prices for food and labor for the need to improve “financial flexibility.”

“Given the impacts of record-level inflation facing the restaurant industry as a whole, we are exploring our options to prudently and proactively ensure the financial flexibility we need to put us in the best position for long-term success,” a company representative said in an email.

Standard and Poor’s (S&P), a bond rating agency, downgraded the credit rating for Checkers’ parent company last month, citing its belief that the company will “need to undertake a restructuring within the next three months.” The agency said that Checkers’ high rate of leverage and its use of PIK, or “payment in kind” debt, make it difficult for the company to complete a turnaround.

PIK debt is the payment of interest on debt traditionally with additional debt and is considered a high-risk form of financing. S&P noted that Checkers’ capital structure was “unsustainable given its high leverage, limited liquidity and considerable payment-in-kind (PIK) debt obligations.”

Checkers has long suggested that it could approach a refinancing this year. The company told Axios last year that it was looking to turn the brand around and to refinance its debt.

Checkers operates more than 800 mostly franchised locations under the Checkers and Rally’s names. Its brands operate drive-thru restaurants.

The company hired Miller Buckfire in 2020 to oversee a potential restructuring. The company has a heavy debt load, due largely to its 2017 sale to Oak Hill, and was considered to be a candidate for a bankruptcy filing.

But the chain’s sales recovered quickly from the pandemic as consumers shifted much of their spending to drive-thrus. It was enough to earn a $20 million cash injection from Oak Hill in 2021. The company has since added a new loyalty program, added voice-activated ordering technology in its drive-thrus and new equipment in its kitchens and last year said it expected to add 60 locations in 2022.

Yet the cost of food and labor have soared in the year since then, with both wages and commodity prices increasing in the double digits, faster than restaurant menu prices. That has thinned profit margins for many restaurant companies and could cause challenges for companies with heavy debt loads.

At the same time, inflation has damaged consumer paychecks, particularly lower-income consumers facing historically high prices for gas and for groceries over the summer. In addition, some of the consumers that flocked to drive-thrus during the pandemic returned to dine-in service.

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