Since the company launched syndication of its $850m term loan B last week (rated B1/B, price talk SOFR+CSA+ 450bps with a 96-97 OID, commitments due 22 June) markets have sold off hard and another eye-watering inflation print has sparked a 75bps rate hike by the Fed.

This raises the prospect of wider pricing for Dave & Busters (to account for market moves since the deal launched) and also highlights the risk of a slowdown in sales, with restaurants expected to be hit as consumers rein in discretionary spending to combat rampant inflation.

One plus point for Dave & Busters is that leverage remains low: after accounting for the new debt and the acquisition of Main Event, leverage is 2.4x on a gross basis and 2.2x net of cash.

That is based on $533m in pro forma adjusted EBITDA, which includes $20m in cost saving synergies from the Main Event acquisition. Closing liquidity will exceed $600m, between cash on hand and funds available under the new revolver.

But despite the relatively benign credit profile, the risk remains that inflation (and all the other pressures of a recessionary environment) will dampen customers’ willingness to pay for the Dave & Buster’s experience. That was enough to persuade some lenders to pass on the deal.

“I would be quite concerned about participating in this one,” said a CLO manager familiar with the credit. “This is exactly the kind of spending that people pull back on during a recession.”

Feeling the pinch

Dave & Buster’s operates restaurant venues that pair full-service dining with arcade games and other entertainment such as virtual reality experiences. It is acquiring Main Event from Australia-based Ardent Leisure Group for a total enterprise value of $835m.

Once combined, the companies will operate a total of 196 locations across the US, with Dave & Busters catering mainly to young adults and Main Event targeting families.

Dave & Buster’s existing debt includes $550m of 7.625% senior secured notes due 2025 (the new TLB matures in 2029) that are currently trading at 100.13. Its stock trades around $36 for a market cap of $1.77bn, down from $1.87bn when the deal launched last week.

As the chart above shows, trading in the company’s stock has been choppy over recent months. But that’s largely a reflection of recent market volatility — the broad trend has been upwards, with the share price up 360% from March 2020.

The company’s earnings are now tracking pre-Covid levels, with revenues estimated at nearly $1.5bn for the LTM period ended in April 2022.

But a recession could break that upwards trend in earnings: sales could suffer as consumers pull back, and inflation could exacerbate the food and beverage business’s Cost Of Goods Sold, which is already on the rise.

Dave & Busters has taken some steps to mitigate higher labor costs. On a lender call last week, interim CEO Kevin Sheehan said the company had scaled back on billable hours by adding technology to allows its servers to handle more tables at once.

Food inflation is another key concern, with the cost of staples like wheat, dairy and meat skyrocketing in recent months. Sheehan said the company has “raised its food prices accordingly,” although he noted two-thirds of Dave & Busters’ sales come from entertainment.

Chris Morris, the CEO of Main Event, said his company had not yet had to raise its food prices, adding that it had seen 20%-30% growth in same-store sales.

Other actions that Dave & Buster’s has taken recently include increasing the minimum spend on its gaming cards (which customers must purchase to play games at the venue) from $10 to $15, Sheehan said.

Tough market

Business risks aside, Dave & Buster’s must also contend with the leveraged loan market, which is not exactly on great form right now.

On the one hand, supply of new loans has been relatively sparse, so this syndication is likely to get “plenty of eyeballs”, sources said; but at the same time, the market seems to edge lower and lower every day.

These days, the word on the street is that ‘95 is the new par’. And on that (admittedly anecdotal and very unscientific) basis, Dave & Buster’s is trying to price its new loan at a premium to the rest of the market.

Even before borrowings costs moved even wider this week, sources speaking with 9fin were already predicting that Dave & Buster’s might have to widen price talk to reflect the risks to its business.

The move wider in spreads may well add to that pressure. “Where price talk is right now is actually above par, if you assume 95 is the new par,” said a portfolio manager. “It is not compelling.”

Dave & Buster’s and Deutsche Bank (lead arranger on the loan) did not return requests for comment.