LOS ANGELES Restaurant bankruptcies are expected to rise in 2009, but some debt-riddled operators are getting more leeway with lenders on hope a government stimulus package could provide relief by mid-year.
Many companies that loaded up with debt during the credit and housing booms are struggling to keep up with loan payments as pinched consumers cut back on restaurant meals during the worst economic downturn since the Great Depression.
As if that were not enough, restaurant chains -- particularly those in the middle of the market -- also are grappling with unprecedented over-saturation. To correct it, thousands of individual eateries are expected to close, as well as some well-known chains.
"Unfortunately, I am expecting bankruptcies to tick up in the restaurant space," said Nick Jachim, managing director at KPMG Corporate Finance LLC, who advises distressed companies.
The owners of eateries such as Bennigan's, Village Inn, Old Country Buffet, Bonanza and Black Angus have already filed for U.S. bankruptcy protection and other names, both public and private, are flashing warning signs.
Across the industry, companies have breached covenants, amended covenants or signaled trouble ahead. They include upscale steakhouse operator Ruth's Hospitality Group Inc, Ruby Tuesday Inc, O'Charley's Inc, and Cheesecake Factory Inc.
DISTRESSED TRADING LEVELS
The bonds of restaurants such as publicly held O'Charley's, Burger King franchisee Carrols Restaurant Group and Chili's Grill & Bar parent Brinker International Inc are now trading at distressed levels, defined as 1,000 basis points over comparable Treasuries, according to Thomson Reuters data.
So are the bonds of private chains such as OSI, Dave & Buster's Inc, Denny's Holdings Inc, Italian eatery Sbarro Inc, Chevys and El Torito owner Real Mex Restaurants Inc, Perkins & Marie Callender's Inc, Uno Restaurant Holdings Corp and even Friendly Ice Cream Corp.
DineEquity Inc, which has significant debt from IHOP's $2 billion purchase of Applebee's in 2007, warned in late October its "margin of error is expected to be tighter than we would like" in 2009.
The company, which declined comment for this article, has been selling restaurants, slashing costs and paying down debt to remain in compliance with debt agreements.
Despite those efforts, its name is among those on the lips of analysts and other experts studying distressed companies.
"DineEquity is definitely on the list," said Research Edge analyst Howard Penney, who was the only person contacted for this story to go on record with his watch list. The list also includes Outback Steakhouse owner OSI Restaurant Partners Inc, which did not respond to a request for comment.
Many financially strapped restaurants are seeing same-store sales declines of 10 percent or more, said Penney.
"Anything from zero to down 5 (percent) is not a disaster. It's the 10-plus numbers that you really have to begin to worry about," he added.
With less money coming in, big debt payments due and virtually nowhere to turn for a loan, troubled operators have little room for error as they operate in an uncertain market.
Restaurants, which had been slashing costs for months, are again sharpening their knives and some analysts are concerned there isn't much fat left to trim.
"Everyone's pretty lean. It is more of a delicate balancing act this year," said Piper Jaffray analyst Nicole Miller.
Leveraged-up franchisees are also vulnerable. Denny's Corp, Domino's Pizza Inc and Brinker are among the companies to have disclosed that some of their individual franchisees have gone bankrupt.
At the same time, some restaurant chains are getting a helping hand from lenders, in the hope that, by mid-2009, the U.S. government will have implemented stimulus measures to stem a tide of layoffs and bolster consumer confidence.
Ruby Tuesday in March said it won temporary waivers on some of its debt covenants. During the reprieve, it worked with its lenders to modify those agreements.
Landrys Restaurants Inc currently is refinancing $400 million in bonds investors had the right to seek repayment on this month and will pay a significantly higher cost for the new debt.
Reed Smith bankruptcy attorney Kurt Gwynne, who represents Bakers Square and Village Inn parent VICORP Restaurants Inc in its bankruptcy, said lenders are looking for ways to work with their borrowers.
While he has not seen lenders ease up on covenants, "it's more of an issue of whether lenders would not exercise their remedies." For example, Gwynne said, a lender may be willing to waive default in exchange for a fee.
And with a lack of financing to keep companies out of bankruptcy or to run companies that are restructuring in bankruptcy, many lenders are reluctant to take the keys away from restaurant owners.
"In the short run, I think lenders are going to try to keep the restaurants going to the extent they can," KPMG's Jachim said. "No one can bleed forever. You've got to stabilize and turn a profit at some point."