A group of Fat Brands creditors is suing the company in bankruptcy court, asking to have a judge determine whether potential buyers of the restaurant chain operator need to pay $195 million in various claims before any sale can be finalized.
The creditors are also shining some light on the sale, the bulk of which is proposed to be sold to creditors in a pair of bids, one for most of Fat Brands, the other for Twin Peaks.
For Twin Peaks, the credit bid totaled $359.5 million, entirely in the form of debt converted to equity in the company.
The Fat Brands bid is for $595 million, again in the form of debt converted into equity, according to court documents.
Two chains are being sold separately. Hot Dog on a Stick is set to be sold to a Las Vegas company for $8 million in cash. Elevation Burger is being sold to a Kuwait company for $2.5 million, though each of these deals must receive court approval. Another chain, Smokey Bones, has shut down.
In total, Fat Brands is being sold for nearly $1 billion, though most of it is in the form of credit conversions and only $10.5 million in cash will be paid for the whole entity.
In court documents, a committee of unsecured creditors noted that other parties were interested in the assets and provided an indication of interest in the different brands. But, according to court filings, Fat Brands “did not progress with the majority of these cash bidders” because of the expected credit bids.
Many of the filings this week are about creditors jockeying for position in advance of the sale hearing as entities owed money look to take their case to a judge. Earlier this week, some creditors argued that a credit bid for Fat Brands did not adequately cover unpaid management fees.
But unsecured creditors went a step further, filing an adversary case in the bankruptcy process while arguing that Fat Brands effectively fronted itself money to pay for operations for years before filing for bankruptcy.
Those creditors are arguing that these funds, known as manager advances, receive priority in a bankruptcy process and should be paid before the secured creditors.
In a securitization, the assets of a borrower are placed with a shell company while the original company contracts to manage those assets. That enables the bonds to be paid and protects the creditors should the company file for bankruptcy.
But the creditors argue that Fat Brands required advances to fund operations for years leading up to the bankruptcy, detailing a growing amount starting as early as 2021. Those advances grew from $11 million in 2021 to $65 million in the first three quarters of last year, ultimately totaling some $195 million, according to court filings.
The credit bids do not require any kind of cash infusion to pay those advances. The bondholders just convert the debt they are owed to equity and effectively take over operation once the sale is processed. But if those bids are approved in their current form, the creditors argue, “the estates will be left without sufficient cash to fund these cases and confirm a chapter 11 plan.”
The creditors argue that these claims should be repaid before the bondholders and those that provided Fat Brands with financing to get through the bankruptcy process.
The case adds to the complexity of the Fat Brands bankruptcy case. The company, formed in 2017 when the owner of Fatburger bought Ponderosa and Bonanza and then went public, amassed some $1.5 billion in debt while buying up large numbers of chains using securitized financing.
Facing a serious cash shortfall, Fat Brands filed for bankruptcy earlier this year. But leading up to and during the filing, the company warred with various lenders over the way Fat Brands was operated, particularly the management of founder and former CEO Andy Wiederhorn—who ultimately stepped down in a deal to finance the company through the bankruptcy process.
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