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Did restaurants escape the bankruptcy wave? Not really

Fewer companies have sought debt protection than expected so far, but many remain in limbo even as states reopen, says RB’s The Bottom Line.
Photograph: Shutterstock

When states began shutting down dining rooms back in March, many of us expected the industry would be hit by an unceasing wave of bankruptcy filings, particularly as June rolled around and chains ran out of cash.

That hasn’t happened. Oh, sure, plenty of companies have sought out debt protection over the past three months. That includes Souplantation and Sweet Tomatoes, the buffet chains that opted to file for Chapter 7 liquidation. Its equipment is getting auctioned off as we speak. Yet there haven’t been as many as expected.

But others surely are coming. Many companies are in something of a limbo state as they try to work their way through the coming months. Navin Nagrani, executive vice president and operating partner with Hilco Real Estate, describes it as a “weird lull.”

He also expects “a lot more bankruptcies” at companies that received rent-deferrals during the pandemic that might come due in the near future.

The biggest potential problems could be among casual dining chains or other concepts that may face sales challenges coming out of the pandemic, anyway, and have sponsors currently questioning the level of investment to put into the business.

Many of these sponsors could opt against adding to their investment, which could prompt such companies to seek out debt protection.

In other words, the industry isn’t remotely out of the woods yet, even as sales improved. Many companies are simply trying to figure out the landscape before taking such a drastic step as a bankruptcy filing.

A number of chains are clearly in danger of such a step, anyway. Chuck E. Cheese’s owner CEC Entertainment has taken the step of giving its executives bonuses and is working to avoid a filing.

Potbelly, meanwhile, is negotiating with the landlords of 100 restaurants that it wants to close, and could end up seeking a restructuring if it can’t get enough of them to agree to have their leases bought out.

Multiple casual dining executives, meanwhile, including Ray Blanchette from TGI Friday’s and Aziz Hashim from Ruby Tuesday, warned of numerous potential closures in the casual dining sector. Hashim himself warned of a potential “bloodbath.”

The problem for many of these companies, however, is a lack of buyers. A handful of companies have set themselves up as buyers of companies out of bankruptcy. No investor provided more of a lifeline to bankrupt restaurant chains than did Landry’s owner Tilman Fertitta.

Yet Fertitta isn’t exactly in a position to take on more restaurant chains. And many of the other buyers have been nowhere to be seen.

One investor who has stepped in on occasion is Robert Earl, whose Robert Earl Group recently acquired Bravo Cucina Italiana and Brio Tuscan Grille for $29 million, mostly in assumed debt.

For the most part, however, buyers have been distressed debt companies, such as Fortress Investment Group, which acquired both Krystal and the old Craftworks concepts in credit deals.

All that said, the major chain universe appears to have escaped the worst of the pandemic shutdown, and many chains have at least reached the point where they are cashflow neutral. Independent and local concepts with a lot less room for error are in far bigger danger overall, and thousands of those locations could close.

But the world of private equity-owned chains with a lot of debt and little or no growth faces a tough few months.

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