Within the last two weeks two large restaurant chains filed for bankruptcy protection in Delaware.
Steakhouse chain Logan’s Roadhouse Inc. filed for bankruptcy protection on August 8, 2016, after striking a deal with Kelso & Co. and one of its bondholders, Blackstone Group’s GSO Capital Partners LP, to swap more than $300 million in debt for control of the restaurant chain’s equity. The 10.75 percent notes were originally issued as a $355 million series in late 2010 to back a sponsor-to-sponsor sale of Logan’s Roadhouse to Kelso & Company from Bruckmann Rosser Sherrill & Co., Black Canyon Capital, Canyon Capital Advisors, and company management. Last fall, investors engaged in a private bond swap, wherein two other series of bonds were put in place. The negotiated pre-packaged bankruptcy plan and restructuring support agreement proposes to pay general unsecured creditors $350,000 if they vote in favor of the plan. Unsecured creditors are owed in excess of $14 million (plus landlord claims related to the closing of 18 restaurants prior to the bankruptcy filing). The committee representing unsecured creditors is expected to challenge the amount to be paid to unsecured creditors under the proposed plan. Logan’s Roadhouse operates 230 company-owned restaurants and 26 franchised restaurants in 23 states.
In addition, on August 10, 2016, Last Call Guarantor, LLC, the owner and operator of 48 Fox and Hound restaurants, 23 Champps restaurants, and 9 Bailey Sports Grille locations filed for bankruptcy protection under chapter 11 of the Bankruptcy Code. Last Call owes more than $75 million to Antares Capital, LP, as successor to General Electric Capital Corporation, under a first lien credit facility, $36 million to certain lenders under a second lien facility, and over $6 million to unsecured trade vendors, landlords and creditors. Last Call is seeking to market and sell its assets through a court-supervised sale process.
These filings are in addition to the recent chapter 11 bankruptcy filings by Quaker Steak & Lube, which operated 19 corporate owned and 43 franchised casual dining restaurants located in 20 states and Canada (QSL was represented by McDonald Hopkins as its restructuring counsel and sold substantially all of its assets to TravelCenters of America); Buffets LLC, which operated 300 restaurants in 35 states, Fired Up, Inc., an operator and franchisor of around 100 John Carino’s Italian restaurants, and Flour City Bagels, a franchisee operating 32 Bruegger’s Bagels in upper New York.
According to a report by KeyBanc Capital Markets, since 2005, the average casual dining check has risen almost 20 percent, while traffic has dipped nearly 30 percent. In addition, according to a recent report in the National Restaurant News, same store sales fell in the casual dining industry for the second straight quarter in 2016. The restaurant industry is facing labor and regulatory hurdles due to minimum wage increases, new overtime laws under the Fair Labor Standards Act, rising health care costs, and joint-employer rulings from the National Labor Relations Board. At the same time, millennials are favoring fast-casual restaurants like Chipotle, Panera, and various fast-casual build your own pizza concepts.
Restaurant operators’ success is dependent on discretionary consumer spending and attracting guests into their restaurants. Time will tell if the experts are correct in predicting a restaurant industry recession for the remainder of 2016.