Thu 07/12/2018 07:13 AM
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A group of lenders to Steak ‘n Shake’s senior secured term loan B has engaged Zolfo Cooper as financial advisor and King & Spalding as legal advisor, according to sources. The lender group is seeking access to Steak ‘n Shake’s data room for insight into its recent performance, when as of the end of the first quarter, the company’s fixed-charge coverage ratio dipped below 1x, triggering a springing lien on all of its real estate assets. The company entered technical default when it failed to pledge the real estate assets by the June 2 deadline but cured the default within the 30-day grace period on June 29, sources said.

The lenders’ move to organize comes as Steak ‘n Shake has shifted its focus from company-owned locations to franchise opportunities in the face of declining revenue, same-store sales and customer traffic as well as increased costs. A wholly owned subsidiary of Biglari Holdings, Steak ‘n Shake is a casual restaurant chain primarily located primarily in the Midwest and South United States; the chain is known for its steak burgers and milkshakes. Biglari says that unlike company-operated locations, franchises have “continued to progress profitably.” “Franchising is a business that not only produces cash instead of consuming it, but concomitantly reduces operating risk,” the 2017 chairman’s letter says.

Even so, 415 of the total 616 Steak ‘n Shake locations are company-operated and creditors are pushing the company to bring in operational advisors, sources say. The company’s $220 million term loan, which according to the Biglari 10-Q had $185.3 million outstanding as of March 31, has dipped to the 86/88 context, according to a trading desk. The term loan, which matures March 19, 2021, is secured by first-priority security interests in substantially all the assets of Steak ‘n Shake, although is not guaranteed by Biglari Holdings. The company’s capital structure as of March 31 is below:
 

Biglari does not report full standalone financials for Steak ‘n Shake, but sources say that Steak ‘n Shake’s revenue for the first quarter of 2018 came in 0.9% under budget at $190.1 million and was down 1.2% year over year. First-quarter “implied EBITDA” (revenue less COGS and SG&A) fell 46% to $5.76 million due to the lower top line and an increase in SG&A expenses, which jumped 7.8% to $28.8 million. Gross margins slipped to 18.2% from 19.4%, while EBITDA margins contracted to 3.03% from 5.53%.

Liquidity may also be an issue. Steak ‘n Shake generated negative $1.3 million of free cash flow (implied EBITDA less capital expenditures, interest for leases and interest expense) in the first quarter of 2018 and reported $23.8 million of cash at March 31, sources said.

The 2018 budget calls for $47 million of implied EBITDA, which compares with $30.8 million for 2017, and $10.9 million of free cash flow, sources said.

Steak ‘n Shake does not have access to a liquidity facility. On Oct. 27, 2017, the company “determined to end the use of its senior secured revolving credit facility,” which was undrawn at the time; the revolver included a leverage maintenance covenant, tested only if the facility had outstanding borrowings. While public filings reference a carve-out for an additional $70 million of term debt under the existing credit agreement, Steak ‘n Shake’s ability to access the incremental amount is subject to covenant restrictions.

Specifically, under the credit agreement, if Steak ‘n Shake were able to meet a 4.4x secured leverage test it could incur $70 million of additional pari incremental term loans. Steak ‘n Shake’s secured leverage ratio as of year-end was approximately 8.5x, based on $261.1 million of total debt including $75.8 million of capital leases and 2017 EBITDA of $30.8 million. The term loan also permits the incurrence of $15 million of unsecured debt, plus $5 million of additional debt secured by real property purchased after the closing date (March 19, 2014).

Biglari says in its first-quarter 10-Q that Steak ‘n Shake’s same-store sales dropped 1.7% in the first quarter, while customer traffic was down 7.2%. Steak ‘n Shake’s annual same-store sales since 2008 are pictured below:
 

Biglari Holdings expects to release 2018 second-quarter results after the market close on Aug. 3, according to the 2017 annual chairman’s letter. Biglari’s reports include consolidated results for its various subsidiaries, which are engaged in “diverse business activities, including media, property and casualty insurance, and restaurants,” with the largest operating subsidiary being Steak ‘n Shake.

Zolfo Cooper declined to comment. King & Spalding did not respond to requests for comment. Biglari Holdings directed inquiries to Steak ‘n Shake, which was not available for comment.
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