Steak ‘n Shake gets credit downgrades after a ‘distressed’ debt repurchase

The company is apparently looking to restructure its loans amid operating challenges from the coronavirus shutdown.
Photograph courtesy of Steak 'n Shake

Moody’s Investors Service on Wednesday downgraded Steak ‘n Shake’s credit rating, warning that the company is in danger of defaulting on its loans following a “distressed” repurchase of some of its own debt.

The Indianapolis-based chain, which is owned by San Antonio-based Biglari Holdings, apparently acquired some of its own term loan at a discount, which both Moody’s and ratings firm S&P Global viewed as a sign of distress.

Steak ‘n Shake is looking to refinance its loan, focused on reducing capital spending and nonessential operating expenses, according to Moody’s.

But that could be a problem. S&P warned that “the recent coronavirus outbreak in the U.S. will limit conventional refinancing prospects.”

Steak ‘n Shake “will face extreme challenges” in refinancing its loans “given the material deterioration in earnings, cash flow and credit metrics by the restrictions and closures across its restaurant base due to efforts to contain the spread of the coronavirus,” Bill Fahy, Moody’s senior credit officer, said in a statement.

Steak ‘n Shake is hardly the only restaurant chain that has had to deal with downgrades in its credit rating in the aftermath of the coronavirus shutdown. With the industry facing massive amounts of financial damage from the limitation or outright closure of so many locations, chains’ credit metrics have declined precipitously.

But Steak ‘n Shake was one of a number of chains facing major question marks going into the coronavirus shutdown, and the associated problems have only made matters worse.

The company had already closed 107 of its 368 company-operated restaurants, with plans to reopen at least some of them in a counter-service model; the chain is typically full service, but with a drive-thru. Franchisees operate its remaining 242 locations.

Steak ‘n Shake’s same-store sales have deteriorated the past three years, including a 6.9% decline in 2019. Traffic, meanwhile, plunged 11.2%.

The company reported an operating loss of $18.6 million, larger than the $10.7 million loss the year before.

The losses had been putting pressure on the company given a $181.5 million loan that comes due next year, a maturity date that was acting as a deadline of sorts for the chain to fix its problems.

Parent company Biglari Holdings does not guarantee that debt. Steak ‘n Shake has been viewed as a prospect for a bankruptcy filing as a result of its operating losses and that maturity date. Indeed, Moody’s said, Steak ‘n Shake’s credit was constrained by its high leverage “and an inability to even partially cover interest expense prior to the impact of COVID-19.”

It’s uncertain how much the coronavirus shutdown has impacted Steak ‘n Shake, though its drive-thru likely offers considerable protection from the downturn experienced by many other full-service chains.

Still, said Fahy, “While many quick-service restaurants are able to provide service through the drive-thru and delivery, restaurant sales will still be well below normal operating levels.”

Moody’s noted that Steak ‘n Shake has support from “strong brand awareness in its core markets and a relentless focus on value that has historically aided same-store sales.”

S&P downgraded Steak ‘n Shake’s rating to “SD,” or “Selective Default,” on April 1 before upgrading it again a few days later. Still, it cited the chain’s “significant debt burden” even after the repurchase, as well as the “massive near-term disruption in the restaurant industry” due to the pandemic.

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