The wave of restaurant chain bankruptcy is not over


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The bottom line

The bankruptcy filing this week by Golden Corral’s second franchisee is at least the 35th such filing by a major franchisee or restaurant chain since the start of the pandemic.

It won’t be the last either. Even if restaurant sales increase, there is a good chance that we could see more deposits like restaurant chain ratings reset as owners and lenders start asking for the funds they are owed.

“What’s going to precipitate more bankruptcies is when the banks have to start, ‘wait a second, it’s been a year, a year and a half now, we’ve got to get the money,” “Dave Bagley, CEO of investment bank Carl Marks Advisors, said in an upcoming episode of the Catering company “A Deeper Dive” podcast. “It happens as summer approaches.”

The biggest problem, he said, is with ratings.

Most of the time, bankruptcy filings are transactional movements. The lender wants to be repaid. Or, in an increasing number of cases, he wishes to take control of a business after acquiring debt in the secondary market. Eighty to 90 percent of those deposits lead to a transaction, Bagley said.

Valuation levels in the food court have been uncertain over the past year. This likely kept many chains from going bankrupt, as lenders had no idea how valuable the business was.

Plus, Bagley said, the lenders didn’t have to push the issue. The same was true with their owners – who have their own debts. The lenders didn’t force them to pay off their debt because they didn’t have to.

This created a “we’re all together” scenario in which landlords didn’t force restaurants to pay all of their rent and lenders didn’t force them to pay off their debts.

This gave the chains more time to develop strategies to survive the pandemic. This has probably kept many restaurants from closing – just 2% of Top 500 restaurants closed last year, a remarkably small number. And only about 5% of casual restaurants have closed, which is also small considering the typical casual restaurant lost about a quarter of its business last year.

“No one pushed the restaurant to do anything,” Bagley said.

It didn’t work for everyone, of course. Some chains were quickly bankrupted and some owners forced the issue of rent. After all, it wasn’t like there was no bankruptcy or closure.

Now restaurant sales are on the rise – many chains have had record sales in recent weeks and just about every industry is experiencing post-pandemic highs, at least, as consumers spend their stimulus money in restaurants.

Plus, Bagley said, some certainty over valuations is ahead. At some point, lenders know what they have. This could force more businesses to go to bankruptcy court.

None of this is to say that we will have a massive wave of bankruptcy filings. But the industry is not quite out of the woods when it comes to seeking debt protection, even with strong sales. Indeed, as I was writing this, we learned of the existence of the 36th Depot, this one from the 13-unit fast and casual restaurant chain Meathead’s Burgers & Fries.


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