Restaurants seek helping hand to avoid bankruptcies

By Lisa Baertlein - Analysis

LOS ANGELES (Reuters) - 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 (RUTH.O), Ruby Tuesday Inc (RT.N), O'Charley's Inc (CHUX.O), and Cheesecake Factory Inc (CAKE.O).

DISTRESSED TRADING LEVELS

The bonds of restaurants such as publicly held O'Charley's, Burger King franchisee Carrols Restaurant Group (TAST.O) and Chili's Grill & Bar parent Brinker International Inc (EAT.N) 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 DAB.UL, Denny's Holdings Inc DENNH.UL, Italian eatery Sbarro Inc SBARO.UL, Chevys and El Torito owner Real Mex Restaurants Inc REALM.UL, Perkins & Marie Callender's Inc, Uno Restaurant Holdings Corp UNORH.UL and even Friendly Ice Cream Corp FRN.UL.

DineEquity Inc (DIN.N), 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 OSI.UL, 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.