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OPINIONFinancing

Lenders weigh a new restaurant landscape

With a lot of operators in dire straits, expect banks to give them breaks—but the post-pandemic lending market could be very different, says RB’s The Bottom Line.
Photograph by Jonathan Maze

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For the past few weeks, lenders to restaurants have been busy working on federal stimulus loans and dealing with a massive group of borrowers that have suddenly seen revenues and earnings evaporate as the coronavirus shutdown took hold.

These lenders will play a vital role in restaurants’ ability to survive the pandemic. And their willingness to continue letting restaurant operators borrow money will play a big role in the industry’s ability to grow in the aftermath.

Much like with everything else, however, the lending market in the future is loaded with uncertainty.

“We’ve never experienced anything like this,” said Mark Wasilefsky, head of the Restaurant Franchise Finance Group for TD Bank. “The ability for restaurants to turn the lights back on, on a full-scale basis, is going to be a factor.”

For the moment, it appears, many banks have been willing to work with restaurant borrowers, deferring payment of principal and interest during the shutdown and giving companies access to lines of credit. Lenders have been busy working with operators.

And, Wasilefsky said, many lenders have been heavily occupied with making Paycheck Protection Program loans. “Those are two huge programs going on that had absolutely nothing to do with our day-to-day business two weeks ago,” he said.

What lenders do in a few months, however, as state requirements ease, is a big question. With so many borrowers having lost much of their cash flow, that will put lenders in a quandary. A huge number of restaurant companies will violate loan covenants.

Too many, in fact, for lenders to call all of them. “I think there will hopefully be some regulatory guidance from” the Federal Reserve, Wasilefsky said. “I hope they don’t leave this to the banks individually.”

Once that issue passes, however, lenders might view the restaurant industry differently. And of course, how they view the industry will largely depend on how consumers view restaurants.

Going into the shutdown, there were some indications lenders were pulling back on loans made to restaurants amid concerns of overleveraged borrowers and a saturated industry.

The shutdown is exacerbating concerns about leverage, while industry saturation is suddenly not a problem.

Kevin Burke, managing partner with Trinity Capital, expects more caution from lenders coming out of the shutdown. And many banks will want to see companies perform for a while before refinancing loans or lending for acquisitions.

“I think the banks are going to want to see a couple of months’ performance before they sign off,” Burke said. “They want to see what the new normal is.”

That is a big question. At the moment, fast-food chains in particular seem to have regained much of their business, along with fast-casual concepts with strong digital strategies, such as Chipotle Mexican Grill.

Casual dining is another story. Bigger chains that have done more work on takeout in recent years have done better. But much of that sector is struggling.

While one group might have an easier time getting lending in a new environment, others will not.

Large concepts with high margins or a “moat” around their business, or with drive-thrus, “had a little more agility” in dealing with the shutdown, Burke said. Smaller brands with smaller ad budgets, no drive-thru or “less of a moat” will struggle emerging from the shutdown and will have a tougher time getting loans.

The franchise sector in particular could see significant changes in the lending landscape. Many large-scale operators of strong brands also went into the shutdown with heavy debt burdens. The shutdown appears to be worsening that challenge.

Some franchisors “have been very aggressive about rebuilds and remodels,” Wasilefsky said. “In certain cases, they’ve put franchisees in highly leveraged positions, though they are high-quality franchisors.”

Some “relatively benign brands,” he said, “may be well positioned to take advantage” of the new market.

The lending market will also dictate much of the merger and acquisition market throughout the industry. The more lenders are willing to make loans, the more deals will get done. Many expect the M&A market to make a comeback at some point, but it will depend on financiers willing to do deals.

“They’ll be cautious,” Burke said, “but they will return.”

Wasilefsky likewise believes that M&A will come back. Investors could find opportunities to pick up good concepts for relatively low prices, and certainly lower than they would have had to pay just a few weeks ago.

“There might be some really, really good opportunities,” he said. But he also added that “cash is king in these situations,” as buyers with the ability to put more equity into a deal will have an easier time getting that done. That will favor buyers with cash sitting on the sideline.

It’s also notable that one big deal has already happened: Roark Capital invested $200 million in The Cheesecake Factory and got preferred stock in the process. Roark was among 20 private-equity firms interested in the deal, according to Bloomberg, and owns 23.5% of Cheesecake stock, according to federal securities filings.

“There’s going to be some activity in the business,” Wasilefsky said. “The business is not going to go away. It’s been ripe for consolidation. There will be winners and losers, and there will be some investment opportunities on a large scale, like a Cheesecake Factory.”

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