(Bloomberg) -- FAT Brands Inc., the owner of restaurant chains Fatburger, Johnny Rockets and Twin Peaks, filed for bankruptcy, adding to a string of casual-dining brands that have sought court protection from creditors.
The Beverly Hills-based company filed for Chapter 11 bankruptcy in Texas on Monday, court documents show. The company has around $1.45 billion of funded debt obligations outstanding, according to a court filing from FAT Brands' chief restructuring officer dated Jan. 27.
The step came after FAT Brands didn't make interest payments due in October on some of its $1.2 billion in whole-business securitization debt. Creditors then called for a full and immediate repayment of that total amount, saying the failure to pay constituted a default. According to the declaration, a group of creditors indicated they would issue a notice of foreclosure on the collateral absent a Chapter 11 filing.
With no restructuring plan in place, FAT Brands plans to rely on cash collateral and future cash receipts to fund the initial phase of the Chapter 11, with the budget only contemplating four weeks of runway, the filing said. FAT Brands will continue to seek fresh financing, given it cannot operate in Chapter 11 beyond this point without additional liquidity.
The collapse follows several other bankruptcies in the casual-dining industry in recent years, including Hooters, Red Lobster and TGI Friday's. Many, like Fat Brands, were loaded up with whole business securitization debt, a product that uses Wall Street financial engineering to lower borrowing costs for franchise-heavy businesses.
FAT Brands received management fees on these securitization vehicles, but they generally have not covered the operating costs of the businesses, according to the court filing. Meanwhile, debt service on the securitizations became "increasingly unsustainable" given ratcheting penalties, while the firm also grappled with inflation, legal fees stemming from governmental litigations and industry headwinds.
The company eventually turned to other financing methods, including non-securitization debt, common and preferred equity, but that wasn't enough to fund the vehicles and plug liquidity gaps.
Generally, FAT Brands' securitzation notes provide that management fees are paid ahead of debt service obligations. Only after that can residual amounts be used to satisfy other operating expenses or distributed to managers. However, without other sources of financing, the company had "no choice" but to use certain collections from the whole-business securitizations to fund their operations, the chief restructuring officer wrote.
This decision to use the cash instead of depositing it into certain accounts as required by the indentures, as well as other factors, prompted events of default.
Casual Dining Demises
Hooters entered Chapter 11 last year with about $300 million of such asset-backed bonds and emerged from that process in recent weeks. TGI Friday's was also funded with that type of debt.
FAT Brands has more than 2,300 eateries around the world, according to its website. The company acquired Italian restaurant chain Fazoli's in 2021 for $130 million and Twin Peaks, a Hooters competitor, for $300 million in the same year.
John DiDonato has been appointed as chief restructuring officer and Abhimanyu Gupta as deputy chief restructuring officer, court documents show.
Food distributor Sysco and food delivery services firm DoorDash are listed in court documents among the company's largest unsecured creditors, with claims of about $5 million and $1.4 million respectively.
The company also has an unsecured claim of almost $4 million for an unliquidated litigation between its subsidiary Fog Cutter and Foot Locker Retail Inc. It's related to alleged environmental contamination stemming from dry cleaning operations on a property which was included in a lease portfolio managed by a former subsidiary of Fog Cutter.
Other eateries in FAT Brands' portfolio include Bonanza Steakhouse, Marble Slab Creamery and Hot Dog on a Stick.
--With assistance from Libby Cherry.
(Updates throughout with court filing details.)
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