Fri 09/17/2021 09:05 AM
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Restaurants Bi-Monthly - July/August 2021


 
Industry Overview

In this issue of Reorg’s Restaurants Bi-Monthly, we provide an overview of credit-driven developments affecting the restaurant industry in July and August, including recent refinancings, companies with expiring covenant relief, the busy IPO market and more.

To view the relevant documents throughout this article as well as our Americas Covenants team's coverage of thousands of other stressed and distressed debt situations including restaurants covenants analysis, request a trial here: https://reorg.com/trial

Reorg Focus

  • In July and August, at least three restaurant companies announced plans to go public, including drive-through coffee chain Dutch Bros, Midwestern fast-casual chain Portillo’s and salad-focused fast-casual chain Sweetgreen. Dutch Bros completed its IPO on Sept. 15; Portillo’s and Sweetgreen each filed their S-1s on a confidential basis.

  • In August, Brinker International and Denny’s refinanced their respective revolving credit facilities with new, longer-dated revolvers that will each mature in 2026. Denny’s has indicated that it intends to use the “enhanced flexibility” provided by the new facility to relaunch its multiyear share repurchase program.

  • BJ’s Restaurants, Cheesecake Factory and Red Robin will have their financial covenants reinstated by the end of the year. Each company has significantly improved its financial ratios over the first and second quarters and appears positioned to meet its upcoming financial covenant tests, assuming current performance continues.

  • On Aug. 17, Fiesta Restaurant Group announced that it had completed the sale of its Taco Cabana business to YTC Enterprises LLC, an affiliate of Yadav Enterprises Inc, for a purchase price of $85 million. The approximately $77 million in net sale proceeds received by the company were used to fully repay Fiesta's approximately $74.6 million of outstanding term loan borrowings under its secured credit facility and related transaction fees and premiums.






Capital Markets

Initial Public Offerings

In July and August, at least three restaurant companies announced plans to go public, including drive-through coffee chain Dutch Bros, Midwestern fast-casual chain Portillo’s and salad-focused fast-casual chain Sweetgreen.

According to its amended S-1 filed Sept. 13, Dutch Bros, which completed its IPO on Sept. 15, intends to use the proceeds from the offering to repay $198.8 million of outstanding borrowings under its senior secured credit facility with JPMorgan, which consists of a $200 million term loan and a $150 million revolver. The credit agreement governing Dutch Bros’ credit facility has not been publicly filed.

Portillo’s and Sweetgreen each filed their S-1s on a confidential basis.




Pre-Restructuring

Covenant Relief Timeline for Select Restaurant Companies

Americas Covenants by Reorg’s updated covenant relief timeline for 11 restaurant companies can be previewed below and is available for download in PDF version HERE.

(Click HERE to access the full timeline.)

The timeline provides a high-level overview of the covenant relief obtained since the onset of the Covid-19 pandemic by a selection of public restaurant companies, including (1) BJ’s Restaurants, (2) Bloomin’ Brands, (3) Brinker International, (4) Cheesecake Factory, (5) Cracker Barrel, (6) Dave & Buster’s, (7) Denny’s, (8) Fiesta Restaurant Group, (9) Noodles & Co., (10) Red Robin and (11) Shake Shack. Specifically, the timeline lays out the timing and level of the next financial covenant test for each company reviewed as well as the duration of the minimum liquidity and basket restriction periods applicable to each company.

Notable updates and developments regarding the covenant relief timeline since June are discussed below.

BJ’s Restaurants

BJ’s Restaurants will have its lease-adjusted leverage ratio covenant and fixed-charge coverage ratio covenant reinstated in September, when they will be tested at 5.75x and 1.75x, respectively. On the basis of the company’s second-quarter financials, we estimate that BJ’s lease-adjusted leverage ratio and FCCR as of June 29 were approximately 4.94x and 1.76x, respectively.

The company’s historical debt and leverage metrics through June 29 are illustrated below for reference:

Brinker International

On Aug. 18, Brinker International replaced its $1 billion revolver, which would have matured Dec. 12, 2022, with a new $800 million revolver maturing Aug. 18, 2026. The new revolver tightens the company’s total net leverage covenant ratio test for the September 2021 period and thereafter to 4.5x (from 4.75x under the old revolver) but contains no interest coverage maintenance covenant (compared with a 1.5x rent adjusted coverage test under the old revolver).

As discussed in our Sept. 3 report, unlike the old revolver, the new revolver requires the company to pledge “Material Real Property” (defined as real property valued at $10 million or more) and certain equity and debt interests of its subsidiaries as collateral to secure the new revolver once the company’s 2023 senior notes are repaid.

The company’s historical debt and leverage metrics through June 30 are illustrated below for reference:

Cheesecake Factory

Cheesecake Factory will have its lease-adjusted leverage ratio covenant and lease-adjusted coverage ratio covenant reinstated in December, when they will be tested at 4.75x and 1.9x, respectively.

On the basis of the company’s second-quarter financials, we estimate that Cheesecake Factory’s rent-adjusted leverage ratio and FCCR as of June 29 were approximately 4.29x and 2.04x, respectively.

The company’s historical debt and leverage metrics through June 29 are shown below for reference:




Denny’s

On Aug. 26, Denny’s refinanced its then-existing revolving credit facility with a new five-year $400 million revolving credit facility. Under the new facility, the company will be subject to tighter financial covenant test ratios for the upcoming September test period, including a 4x total leverage test (compared with 4.75x under the old revolver) and a 1.5x FCCR test (compared with 1.25x under the old revolver).

As a result of the refinancing, the company is no longer subject to the minimum liquidity requirements and restrictions on basket usage that applied under the old facility. In an August 26 release, management indicated that “[w]ith the enhanced flexibility provided by the new credit facility,” the company intends to relaunch its multiyear share repurchase program with about $248 million remaining in authorized share repurchases.

On the basis of the company’s second-quarter financials, we estimate that Denny’s total leverage ratio and FCCR as of June 30 were approximately 3.67x and 1.86x, respectively.

The company’s historical debt and leverage metrics through June 30 are illustrated below for reference.

Fiesta Restaurant Group

On Aug. 17, Fiesta Restaurant Group announced that it had completed the sale of its Taco Cabana business to YTC Enterprises LLC, an affiliate of Yadav Enterprises Inc., for a purchase price of $85 million.

According to the release, the approximately $77 million in net sale proceeds received by the company were used to fully repay Fiesta's approximately $74.6 million of outstanding term loan borrowings under its secured credit facility and to pay a roughly $2.2 prepayment premium, among other transaction fees.

Notwithstanding the early repayment of the term loan, the $10 million revolver under the company’s senior credit facility remains in place, which means that the company will continue to be subject to the facility’s minimum liquidity requirement until it expires in January 2022, when the requirement will be replaced with a 3.5x total leverage covenant.

The company’s historical debt and leverage metrics through July 4, pro forma for the August term loan paydown, are shown below for reference:

Red Robin

Red Robin will have its lease-adjusted leverage ratio covenant reinstated in October, when it will be tested at 5x. The October test period marks the first time that the company’s financial ratios will be tested since April 2020.

Although the company’s FCCR covenant was originally supposed to be reinstated in October as well, the company’s 10-Q for the period ended July 11 states that the company has "proactively obtained a waiver from [its] lenders, waiving the application of [its] FCCR [test]" for its third and fourth fiscal quarters "due to an anticipated delay in the timing of receipt of cash tax refunds." A copy of this waiver has not been disclosed.

On the basis of the company’s second-quarter financials, we estimate that Red Robin’s lease-adjusted leverage ratio and FCCR as of July 11 were approximately 6.63x and 1.27x, respectively.

The company’s historical debt and leverage metrics through July 11 are shown below for reference:



 




Bankruptcy

Filings in the Last 12 Months

A noncomprehensive list of restaurant businesses that have filed for bankruptcy protection in the last 12 months is shown below:

 




Other Coverage and Analysis

New / Updated Covenant Analysis

Papa John’s

In July, Americas Covenants by Reorg initiated coverage on Papa John’s Pizza, which recently issued $400 million of 3.875% senior notes due 2029. For an analysis of Papa John’s capital structure and debt documents, including the new 2029 notes, click HERE.

Brinker International; Carrols Restaurant Group

We also updated our coverage of Brinker International, which refinanced its revolver in August, and Carrols Restaurant Group. For updated covenants tear sheets on these companies, click HERE for Brinker and HERE for Carrols.

--Julian Bulaon
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