In late August, Tex-Mex chain Taco Bueno hired Houlihan Lokey Capital to restructure the business and ultimately find a buyer.
And then the skies opened up.
Between Sept. 1 and Oct. 17, more than 23 inches of rain fell at the Dallas-Fort Worth International Airport, making it the wettest fall on record, according to court documents in Taco Bueno’s bankruptcy filing this week.
The rain led to a 20% decline in sales at the 169-unit chain.
For a chain with $130 million in debt and leased locations, the decline proved too much. It led to a shortage in liquidity that was so severe the company had to explore a debt sale and equity swap and bankruptcy to ensure the company could get cash needed to maintain its operations.
The company also feared that its landlords would start evicting locations. One filing indicated that the landlord of one of its most profitable Dallas-area restaurants was beginning proceedings to evict the chain from the space.
“As a result of these pressures on the company, it became evident that the company did not have the necessary liquidity to continue the sales process,” Adam Dunayer, managing director for Houlihan Lokey, wrote in an affidavit filed with the U.S. Bankruptcy Court in Dallas. “Ultimately, the risk of landlords taking action against valuable stores and the extreme top-down pressure on business operations led Houlihan and the company to pivot and consider other potential transactions.”
Taco Bueno isn’t the only chain facing sales pressures due to heavy rains in Texas. Casual-dining chain Chuy’s reported a decline in same-store sales and blamed the problems in part on the bad weather in its home state.
Nor was it just Texas. Casual-dining chain operator Del Frisco’s Restaurant Group earlier this week said that heavy rains in the Northeast led to a 14.1% decline in same-store sales at five Bartaco locations in the region.
But the problem at Taco Bueno illustrates the position companies put themselves in when they leverage themselves to the hilt: One bad month can end it all.
Taco Bueno opened its first location in Abilene, Texas, in 1967 and at one point had 179 locations across Texas, Oklahoma, Louisiana, Arkansas, Missouri and Kansas.
According to another filing, the company suffered from “historical mismatches between price and product value, a lack of product innovation and deferred maintenance.”
Haywood Miller, managing director of Berkeley Research Group and who has served as the company’s chief restructuring officer, also blamed growing competition in the Mexican space as more quick-service chains sell tacos.
Earlier this year, Taco Bueno named Omar Janjua the company’s CEO, and the chain quickly moved to close 16 locations. But that wasn’t enough, according to Miller. “Taco Bueno continues to suffer from a number of underperforming locations,” he said in a filing.
He noted that new management, led by Janjua, began implementing a new business plan that included new recipes, fresh ingredients, new product lines, street tacos, seasonal items and a modern marketing campaign.
But, Miller wrote, “limited capital, seasonal constraints on customer traffic and burdensome funded debt and lease obligations made for a challenging environment for sustained success and adversely impacted new management’s ability to effectuate the turnaround effort.”
The problems at Taco Bueno ultimately led to its sale to Sun Holdings, a large, Dallas-based franchisee of more than 800 restaurants in several concepts, notably Burger King, Popeyes, Arby’s, Krispy Kreme and others.
Sun last month won a silent auction for Taco Bueno’s debt. Sun then agreed to a debt-for-equity swap that will give it control of the fast-food chain once the bankrutpcy process is complete.
It’s not certain how much Sun agreed to pay for the debt, but according to bankruptcy filings, bids on that debt began at $15 million. Sun also agreed to provide the chain with financing that will enable it to operate during the bankruptcy process.
Debt sales are common, particularly in the restaurant business, as lenders sell loans for less than their face value to get out of the business. But typically, a hedge fund or private-equity group will acquire a struggling company’s debt and then engineer a debt-for-equity swap to take control of the company in a bankruptcy process.
In this instance, according to the filing, the debt sale was done to speed the process, given Taco Bueno’s cash problems.
By filing for bankruptcy protection, Sun Holdings will be able to end leases at Taco Bueno’s struggling locations. The company has also vowed to invest in remodels and put the chain’s “Plan to Win” in place.