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Steak ‘n Shake gets a credit downgrade

Standard and Poor’s lowered its rating on the chain’s debt, saying it has an “elevated risk for a debt restructuring.”
Photograph courtesy of Steak 'n Shake

Weakening operating performance is putting fast-food burger chain Steak ‘n Shake at a heightened risk for a debt restructuring, according to a new review by credit ratings service Standard and Poor’s 500.

The ratings service lowered Steak ‘n Shake’s credit rating to CCC- from CCC. The company also said that Steak ‘n Shake’s outlook is “negative.”

The rating is “non-investment grade,” often known as junk, and suggests the company depends on more favorable business conditions to be able to meet its obligations.

S&P’s outlook “reflects our belief that the company may be unable to meet its financial obligations because of its weakened liquidity and thus could pursue a restructuring or a distressed exchange in the next six months.”

Six hundred-unit Steak ‘n Shake took out a $220 million term loan in 2014 that comes due in 2021. The company has a $5 million interest payment due in September. About $184 million is outstanding on that loan.

S&P said that it expects the company to “generate significant negative free operating cash flow” and believes there is “an elevated likelihood” that the company will be unable to make near-term payments on the loan.

The downgrade is the latest sign of problems for the Indianapolis-based chain, which is owned by San Antonio-based investment firm Biglari Holdings.

Steak ‘n Shake has been closing locations, many of them “temporarily,” to prepare them to be sold to franchisees who pay $10,000 for the right to run the locations and split the profits with the company.

Steak ‘n Shake recently reopened one of those locations under franchisee ownership, the first recorded reopening of a closed location.

But at least 46 company-owned locations have closed, and others could close later this year. The locations are believed to be having financial problems. Closing locations to be refranchised is an unusual strategy.

At the same time, however, the company has faced some operational problems at other locations. Two restaurants in Toledo, Ohio, reopened last week after they were closed days earlier by local health inspectors.

Moody’s previously downgraded Steak ‘n Shake’s credit rating in April.

Steak ‘n Shake’s lenders reportedly hired attorneys last year amid concern about the operation of the business.

Same-store sales have been falling in recent quarters, including a 7.9% decline in the first three months of this year. The key performance metric has been down in 11 of the past 12 earnings periods.

In May, the company was forced to pay out $7.7 million in damages over an unpaid overtime lawsuit in the St. Louis area. It faces a similar lawsuit covering other restaurants.

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