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OPINIONFinancing

Why restaurants are drawing down on credit lines

Some of them need the cash, but is also reflects concerns that companies could lose access to the funds, says RB’s The Bottom Line.
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the bottom line

Since restaurant sales began falling off a cliff the second week of March, a steady parade of restaurant companies have announced that they drew down on revolving credit lines to shore up their cash position.

Denny’s was the first company to take this step, and since then, the vast majority of publicly traded restaurant companies have done the same.

There are some notable exceptions, including Papa John’s, which more or less said its access to credit is on standby as its sales appear to be weathering the storm, and Dave & Buster’s, which has been quiet other than swallowing a poison pill. Even Domino’s Pizza accessed its credit line.

Numerous privately held companies have taken similar steps, as have some large-scale operators.

The main reason companies are taking this step is pretty simple: They need the cash to weather a potentially major storm. And the uncertainty that faces the industry, including how severe the sales challenges will be, how long the shutdown is going to last and what the economy will look like when it’s over, has companies playing defense right now.

Restaurant companies have lost a lot of sales. Many full-service restaurants are closed outright. Those that are left are trying to make things work with just a fraction of their total sales.

While takeout and delivery sales have thrived, they don’t come close to making up for the dine-in sales that were lost. Consumers stocked up on groceries—pantry loading—and are venturing outside the house a lot less.

It’s also notable that a huge number of consumers are suddenly without a job. Estimates from the Federal Reserve Bank of St. Louis suggest more than a third of Americans could be unemployed as a result.

Companies will need the cash to get through this period.

Even franchisors are taking this step, including giants such as McDonald’s, KFC owner Yum Brands and Burger King owner Restaurant Brands International.

Franchise companies’ situation is a big different. They stand to lose considerable income as the situation persists. Franchisees with little or no revenue pay little or no royalties or rent, after all, because most of those funds are calculated as a percent of revenue.

But the franchisors also need the cash to get their operators through the crisis. Franchisees are facing the same challenges that other operators are facing, and most of them are taking steps to address the situation.

At the same time, some companies are accessing their credit lines because it might not be available when they actually do need it.

As we wrote about yesterday, a number of companies are already seeing their credit ratings downgraded as the shutdown intensifies questions about the financials of restaurants.

Even strong restaurant companies could end up tripping their financial covenants and thus won’t be able to access the cash. So companies are taking the cash out now, just in case.

“Their desire is to get the money in the door now before conditions deteriorate,” said Jordan Myers, an attorney with Atlanta law firm Alston & Bird.

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