Do not expect a resolution to Fat Brands’ debt problem anytime soon.
Andy Wiederhorn, the CEO and majority owner of the restaurant chain collector, said that the process for renegotiating the company’s debt is “painful and slow,” and that he hopes to resolve the situation “out of court.”
But he did not exactly dismiss the possibility of resolving its debt challenges in bankruptcy court, either. “We’re trying to resolve it out of court,” Wiederhorn said at the ICR Conference in Orlando on Tuesday. “There’s some benefits to resolving it in court.”
“It’s not for lack of trying that we want to resolve it,” he added. “But it’s complicated.”
Wiederhorn and Fat Brands CFO Ken Kuick sat for what was a largely vanilla interview at the conference. Yet it came as the company faces a legitimate prospect of a bankruptcy filing after it missed a debt payment last fall.
That prompted the trustee on the company’s whole business securitization financing to demand full payment on its bonds, which in turn led Fat Brands to warn of a possible bankruptcy filing. Fat Brands owes about $1.4 billion. The company has been trying to refinance that debt for several months.
Last week, meanwhile, the company gave large raises and retention bonuses to a trio of company executives, including Wiederhorn’s two sons, to remain with the company through June should it file for bankruptcy. The company is also in danger of having its stock delisted from the Nasdaq exchange.
(Check out here for our explanation of Fat Brands’ debt problem.)
Fat Bands, Wiederhorn said, does not guarantee any of the debt. Rather, he said, the $1.4 billion is guaranteed by the restaurant chains themselves. It is divided into five different entities.
“The debt is at the brand level only, and it’s in five different securitization trusts secured by different brands,” Wiederhorn said. “There are five different loans. Each loan has a senior position, a supported position. You have 25 investors that make up those noteholders.”
Wiederhorn seemed to suggest that a lack of agreement among the noteholders has been keeping the negotiation from being completed quickly.
“They’re having a hard time agreeing on anything,” he said. “That kind of stuff is what’s making this painful and slow.”
Wiederhorn suggested that the company got caught in the inflation-created interest rate increase environment that emerged in late 2021. Fat Brands’ in 2020 and 2021 bought $900 million worth of restaurant chains in less than 18 months, funded with a series of whole business securitizations.
He said that the company took out that debt on an “unrated” basis, so a rating agency did not rate the bonds. Wiederhorn planned to refinance that debt in 2022 and have them rated, which he said would have lowered the interest rate by about 300 basis points.
Yet the U.S. Federal Reserve to raise interest rates aggressively starting in late 2021 to deal with inflation. By 2022, if Fat Brands refinanced the debt, Wiederhorn said, the company’s costs would have increased. “The equity market disappeared for restaurants, and so refinancing the debt didn’t make sense,” he said.
The costly debt “sucked a lot of capital out of the company.”
All that said, Wiederhorn insisted that Fat Brands’ concepts are doing just fine, considering the environment.
Fat Brands’ same-store sales have declined each of the past eight quarters through the third period of last year. The company has yet to release its fourth-quarter earnings.
Wiederhorn noted that the company’s same-store sales are down 3% to 3.5%. “It’s not terrible,” he said. “We sold 200 new stores, but we opened 70-something new stores and 100 this year. So the brands are really performing well, and that’s very different than other brands that we witnessed last year. We still have brands in good shape.”
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