Fast-food restaurant chain collector Fat Brands declared bankruptcy on Monday under a mountain of debt and after it was unable to come to an agreement with its bondholders.
The company owes $1.45 billion in securitized debt, most of which is through a series of whole business securitizations (WBS) taken out in 2020 and 2021 to fund several acquisitions. Yet those securitizations left the company without enough funds to cover its costs, effectively “starving the business,” according to a court filing this week.
The company has hired a chief restructuring officer, John DiDonato, the managing director of Huron Consulting Services, along with a deputy in Abhimanyu Gupta. It has also appointed a pair of independent directors that will evaluate strategic alternatives to restructure the business.
The company, which also placed into bankruptcy each of five subsidiaries created to take out debt, is asking for mediation to negotiate with its bondholders.
Court filings describe a company that was increasingly burdened with its debt and took increasingly desperate attempts to fund its day-to-day operations.
Securitizations such as those at Fat Brands are set up so that the assets are placed under separate entities and the corporate management team is appointed as “manager” and paid a fee to fund operations.
Yet, according to DiDonato in a court filing, Fat Brands’ management fee covered only 80% of the costs of the business.
Fat Brands planned to grow its way through that challenge, but the economy, including inflation, made that more difficult.
“The management fees do not cover the operating costs in ordinary industry conditions,” DiDonato wrote in a court document. “And, in recent years, industry conditions have been anything but ordinary due to inflation and persistent economic uncertainty.”
Fat Brands in court documents said that the trustee of its securitizations had instituted a “manager termination event,” which could have placed control of the company’s assets under a different entity, though that step was never taken.
According to court filings, Fat Brands took out several other secured loans guaranteed by various assets, most of which come with interest rates in the mid-teens. The company and its various subsidiaries owe $47.35 million under such loans.
The company also owes $104 million in various unsecured debt and has $25 million in tax liabilities.
“To address this deficit,” DiDonato wrote, Fat Brands “had no choice but to look to non-securitization debt, unspent advertising costs, common and preferred equity raises and the sale of additional securitization notes that had been retained or purchased by debtors.” The company said in a court filing that it used $8.6 million in “unspent advertising costs as an additional source of liquidity.”
“Ratcheting penalties” from that debt also made matters worse. Fat Brands has paid $72 million in penalty interest and amortization payments since 2022, according to court documents.
The company had little cash, including just $2.1 million in unrestricted cash as of Jan. 23 and another $19.9 million in cash held under “restricted accounts” not under its control.
(Check out an in-depth look at Fat Brands’ financial problems.)
In a note sent to employees, seen by Restaurant Business, CEO Andy Wiederhorn called the bankruptcy filing “a proactive step to restructure our finances, reduce debt and position us for sustainable growth.”
“The market conditions over the past few years have been difficult, creating challenges in restructuring our debt, which we took on to strategically grow the Fat Brands portfolio,” he said.
Fat Brands started out as Fatburger, owned by Wiederhorn, until 2017 when the company acquired Ponderosa and Bonanza and went public that year through a so-called mini-IPO. It mostly acquired small brands at super-low prices until 2020, when it started using a series of securitization financings to acquire some $900 million worth of restaurant chains.
It acquired Johnny Rockets and Round Table Pizza owner Global Franchise Group, along with Fazoli’s and Twin Peaks, and later Nestle Toll House Café and Smokey Bones. Fat Brands’ various restaurant chains have 2,200 locations and 7,500 locations.
The company spent much of the past couple of years fighting federal tax charges that were dropped last year. Fat Brands accumulated $85.5 million in legal costs fighting those charges, according to court documents.
But while Wiederhorn and Fat Brands were able to emerge from those charges, it was unable to escape the reality of its debt burden and the increasing difficulties associated with the economy and its cash position. Same-store sales at its restaurant chains have declined for eight straight quarters.
Twin Peaks, which it spun off in an IPO last year, has seen same-store sales fall for four straight quarters.
The companies have been subject to a series of lawsuits in recent years in state and federal court, from shareholders, lenders and franchisees of its various brands. Franchisees from both Round Table Pizza and Hurricane Grill and Wings over misuse of marketing funds.
Fat Brands is the third major restaurant company using securitization financing to file for bankruptcy over the past two years, following TGI Fridays and Hooters. Both of those casual-dining chains have since emerged from bankruptcy with new owners.
Fat Brands recently gave three top executives, two of whom are Wiederhorn’s sons, large raises and retention bonuses to remain with the company through June should it file for bankruptcy.
Wiederhorn himself at the ICR Conference said that negotiations on the debt were “painful and slow” and also stressed that the debt all rests with the brands themselves and is not guaranteed by the parent company.
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