Shake Shack Inc.
Issuer Covenant Card: Shake Shack Inc.
Fri 04/24/2020 12:29 PM
Relevant Items:
Shake Shack Debt Documents
Shake Shack Covenants Tear Sheet, Debt Document Summary
Shake Shack Inc. is an American fast casual restaurant chain that serves burgers, hot dogs, shakes and other “classic American” items. As of Dec. 25, 2019, the company operated and licensed more than 275 restaurants, including 185 domestic and 90 international locations.
On March 24, the company disclosed in a coronavirus-related update that on March 19 it had fully drawn all $50 million of commitments under its revolver. Subsequently, on April 17, the company filed an 8-K containing, among other things, supplemental risk factor disclosures regarding the business impact of the coronavirus, including that the company would “likely ... be unable to continue to comply with certain covenants contained in [its] credit facility, potentially as early as the second quarter compliance date.”
Shake Shack also announced that from April 17 to 20, it issued Class A common stock in an underwritten offering for gross proceeds of $135.9 million and in an “at-the-market” offering for gross proceeds of $9.9 million, for total gross proceeds of $145.8 million.
The company’s capital structure and leverage metrics as of Dec. 25, 2019, are shown below, pro forma for certain adjustments through April 20.
We estimate that Shake Shack had approximately $258 million of immediately accessible liquidity as of April 20, reflecting an increase of approximately $171 million from company-reported liquidity as of Dec. 25. The bulk of the $171 million of additional liquidity consists of approximately $146 million of gross proceeds received from the company’s recent equity offering of its Class A common shares, which was completed on April 20. (The company did not report proceeds on a net basis.) The equity offering proceeds were received by the upper holding company Shake Shack Inc., the parent of the borrower under the company’s revolver; the company may use the proceeds to service operating expenses and debt and lease obligations to the extent contributed to its operating subsidiaries.
Shake Shack Inc. sits outside the revolver agreement’s restricted group. Therefore, in addition to providing Shake Shack with additional liquidity to meet its operational expenses and contractual payment obligations, the equity offering proceeds could potentially help the company remain in compliance with the financial covenants under its revolver agreement to the extent the proceeds are contributed to the restricted group.
Shake Shack’s revolver agreement contains a 4x lease adjusted net leverage covenant and a 1.25x fixed charge coverage covenant. The leverage ratio is generally calculated as the ratio of (a) debt, net of up to $35 million of cash, plus 8x cash rental expense to (b) adjusted EBITDAR. As discussed in our April 14 report, which was published before the recent equity offerings, assuming constant covenant debt of $320 million, we estimate that Shake Shack must maintain minimum adjusted EBITDAR of $80 million as of the end of each fiscal quarter in order to remain compliant with the leverage covenant. In addition, assuming constant adjusted EBITDAR of $119 million, we estimate that Shake Shack cannot incur more than $157 million of total additional debt.
If the company breaches its leverage covenant, the revolver agreement contains equity cure mechanics that permit the company to “cure” the breach by contributing a minimum amount of capital to the borrower within approximately nine days following the delivery of its quarterly financial statements. Capital contributed to the borrower pursuant to the equity cure provisions may be added to EBITDAR for the applicable test period to the extent necessary to achieve compliance with the leverage covenant. Note, however, that equity cure contributions to the restricted group do not build EBITDAR for purposes of any other ratio tests under the credit agreement (for example, leverage-based baskets for debt and restricted payments).
As to the 1.25x fixed charge coverage covenant, that ratio is generally calculated as the ratio of (a) EBITDAR less unfinanced capex to (b) the sum of interest expense, rent expense, scheduled principal payments of long-term debt and aggregate restricted payments. We estimate that the company’s fixed charge coverage ratio was approximately 5x as of April 20.
Shake Shack Debt Documents
Shake Shack Covenants Tear Sheet, Debt Document Summary
Shake Shack Inc. is an American fast casual restaurant chain that serves burgers, hot dogs, shakes and other “classic American” items. As of Dec. 25, 2019, the company operated and licensed more than 275 restaurants, including 185 domestic and 90 international locations.
On March 24, the company disclosed in a coronavirus-related update that on March 19 it had fully drawn all $50 million of commitments under its revolver. Subsequently, on April 17, the company filed an 8-K containing, among other things, supplemental risk factor disclosures regarding the business impact of the coronavirus, including that the company would “likely ... be unable to continue to comply with certain covenants contained in [its] credit facility, potentially as early as the second quarter compliance date.”
Shake Shack also announced that from April 17 to 20, it issued Class A common stock in an underwritten offering for gross proceeds of $135.9 million and in an “at-the-market” offering for gross proceeds of $9.9 million, for total gross proceeds of $145.8 million.
The company’s capital structure and leverage metrics as of Dec. 25, 2019, are shown below, pro forma for certain adjustments through April 20.
Liquidity and Financial Covenants
We estimate that Shake Shack had approximately $258 million of immediately accessible liquidity as of April 20, reflecting an increase of approximately $171 million from company-reported liquidity as of Dec. 25. The bulk of the $171 million of additional liquidity consists of approximately $146 million of gross proceeds received from the company’s recent equity offering of its Class A common shares, which was completed on April 20. (The company did not report proceeds on a net basis.) The equity offering proceeds were received by the upper holding company Shake Shack Inc., the parent of the borrower under the company’s revolver; the company may use the proceeds to service operating expenses and debt and lease obligations to the extent contributed to its operating subsidiaries.
Shake Shack Inc. sits outside the revolver agreement’s restricted group. Therefore, in addition to providing Shake Shack with additional liquidity to meet its operational expenses and contractual payment obligations, the equity offering proceeds could potentially help the company remain in compliance with the financial covenants under its revolver agreement to the extent the proceeds are contributed to the restricted group.
Shake Shack’s revolver agreement contains a 4x lease adjusted net leverage covenant and a 1.25x fixed charge coverage covenant. The leverage ratio is generally calculated as the ratio of (a) debt, net of up to $35 million of cash, plus 8x cash rental expense to (b) adjusted EBITDAR. As discussed in our April 14 report, which was published before the recent equity offerings, assuming constant covenant debt of $320 million, we estimate that Shake Shack must maintain minimum adjusted EBITDAR of $80 million as of the end of each fiscal quarter in order to remain compliant with the leverage covenant. In addition, assuming constant adjusted EBITDAR of $119 million, we estimate that Shake Shack cannot incur more than $157 million of total additional debt.
If the company breaches its leverage covenant, the revolver agreement contains equity cure mechanics that permit the company to “cure” the breach by contributing a minimum amount of capital to the borrower within approximately nine days following the delivery of its quarterly financial statements. Capital contributed to the borrower pursuant to the equity cure provisions may be added to EBITDAR for the applicable test period to the extent necessary to achieve compliance with the leverage covenant. Note, however, that equity cure contributions to the restricted group do not build EBITDAR for purposes of any other ratio tests under the credit agreement (for example, leverage-based baskets for debt and restricted payments).
As to the 1.25x fixed charge coverage covenant, that ratio is generally calculated as the ratio of (a) EBITDAR less unfinanced capex to (b) the sum of interest expense, rent expense, scheduled principal payments of long-term debt and aggregate restricted payments. We estimate that the company’s fixed charge coverage ratio was approximately 5x as of April 20.
Covenant Conclusions
- Debt and liens - The debt and lien baskets under the revolver agreement permit the company to incur approximately $375 million of general purpose debt, including (a) $100 million of first lien incremental debt, (b) $25 million of general debt, which can be secured but only by noncollateral or could be incurred on a structurally senior basis, and (c) $250 million of unsecured debt subject to pro forma compliance with 4x lease adjusted net leverage. As noted above, however, assuming LTM adjusted EBITDAR as of Dec. 25 of $119 million holds constant, we estimate that Shake Shack cannot incur more than $157 million of total additional debt under its leverage covenant as of April 20.
- Dividends, transfers to unrestricted subsidiaries - The revolver agreement contains a ratio basket that can be used to make dividends and transfer assets, and it permits an unlimited amount of such transactions subject to pro forma compliance with a 3.5x lease adjusted net leverage test and minimum liquidity requirement of $25 million. As mentioned above, we estimate that the net leverage ratio was about 2.7x as of April 20. The revolver agreement also provides capacity for general investments of $25 million and cash investments in nonguarantor subsidiaries of $50 million plus other specific-use amounts.
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