Last week, Fat Brands revealed that the trustee on its securitization financing is demanding full payment on nearly $1.3 billion in loans, which is what happens when a company doesn’t have enough available funds to make a payment.
The filing raised questions about the future of the owner of Johnny Rockets, Fazoli’s and Twin Peaks.
It should also raise questions about the aggressive use of whole business securitization financing. The lending structure, in which companies use their revenue-generating assets to guarantee bonds, is loved throughout the restaurant industry for enabling cheap debt.
Since last year, two companies using securitization financing, TGI Fridays and Hooters, landed in bankruptcy. Fat Brands could well be the third, which seems inevitable, especially if the trustee on the securitization forecloses on the company.
For what it is worth, Fat Brands in a message to franchisees, seen by Restaurant Business, said it is “working through standard capital-markets discussions” and that it is “business as usual in the restaurants.”
“We are in active, constructive discussions with our bondholders to prudently reshape parts of our balance sheet,” CEO Andy Wiederhorn said in the message. “These negotiations are part of a broader effort to strengthen the company financially so we can keep investing behind our brands, accelerate development, and support your business for the long term.”
Fat Brands has $1.3 billion in debt and a market cap of $8 million and net loss this year alone of $158 million. It has been accused of raiding the marketing funds of Hurricane Grill and of Round Table Pizza. In the last case, it missed a payment to a marketing consultant, leaving that company without any advertising for several months.
Round Table franchisees have also accused Fat Brands of not sending them rebates from Pepsi that were to be held in an escrow account.
From 2017 to 2020 Fat Brands largely shopped the bargain bin for companies like Hurricane Grill, Yalla Mediterranean and Elevation Burger. Its 2019 acquisition of the latter chain illustrates just the type of financing it needed for that kind of expansion.
Then the company merged with Wiederhorn’s investment firm Fog Cutter Capital and it started buying up chains, starting with Johnny Rockets ($25 million), then Global Franchise Group ($442 million), then Twin Peaks ($300 million), then Fazoli’s ($130 million). A company that at one point needed to borrow $20 million at 20% interest from Sardar Biglari was suddenly buying up hundreds of millions worth of restaurant chains.
Fat Brands wouldn’t have been able to do that on its own. But it could use securitization financing, where the structure protects bondholders enough that any fears of excessive debt or borrower finances go out the window, apparently.
(For more on whole business securitizations, read here.)
Debt is important in the restaurant industry. Without it, companies couldn’t open locations, remodel locations, buy equipment or exit their investments. They certainly couldn’t buy other restaurant chains.
But excessive debt is a problem. It puts pressure on companies and operators to generate consistent revenue and earnings. It gives operators little room for error if something happens. And then they do things such as, apparently, raiding marketing funds or not sending rebates to franchisees when they’re due.
In this case, securitization enabled Fat Brands to act like an 18-year-old given a credit card with a $50,000 limit.
The company bought these restaurant chains when companies were selling at peak value. Yet soaring inflation led to a reconfiguration of industry valuations. It also led fast-food chains to raise prices aggressively. Customers eventually balked at those prices, traffic and sales fell. In Fat Brands’ case, its collective same-store sales have fallen for eight straight quarters.
Falling sales and excessive debt is a significant problem.
Securitization financing on its own is not a problem. Plenty of strong restaurant chains use the financing successfully and without running into major problems. And plenty of investors bought up restaurant chains at excessive prices with too much debt during the post-pandemic buying binge.
But it can clearly be used to excess. That was the case with TGI Fridays and Hooters. And it was with Fat Brands.