Benchmark prior transactions, bonds, loans or company profiles using over 300 credit metrics.

Comparables

AI transcripts & instant analysis, making earnings season easier than ever.

Earnings

A full suite of ESG data and analysis. Built for your workflow

Spot undervalued credits and potential future restructurings with our purpose-built tools.

Distressed and Restructuring

Full Financial profiles with 3 statements, KPIs, segment splits & credit metrics. All traced to source documents.

Financials

New deal analysis and covenant comparison tools, understand key risks in seconds not days.

Covenants

Say goodbye to CTRL + F with our powerful search. Thousands of documents text searchable for any keyword or phrase.

Search

We've successfully predicted more than 65 price sensitive events - before they happened.

Deal predictions

We use AI to aggregate newsflow from 2,000 sources, and deliver it to your inbox quicker than anyone else.

News

Track high yield deals from issuance through to maturity, with integrated legal, credit and ESG analysis.

High Yield Bonds

Shine a light on private markets with 9fin's news and legal analysis of syndicated loans

Leveraged Loans

21st century tech and expert analysis to help CLO teams make informed decisions faster.

Structured Credit 

Find information others can't see in one of the fastest growing corners of finance

Private Credit 

Emily Fasold

Bill Weisbrod

Rachel Butt

Last fall, we looked at how investor appetite for restaurant debt was ramping up as the commodity inflation that plagued the industry in 2022 finally started to cool off — but a recent string of restaurant bankruptcies suggests a bleaker outlook for the sector.

Seattle-based fast casual chain Mod Pizza is the latest example. Earlier this month, the CD&R-backed company (which specializes in artisanal build-your-own pizzas) announced that it had agreed to be acquired by Elite Restaurant Group in a deal that many saw as a way to avoid a potential bankruptcy filing.

Financial terms of the deal were undisclosed, but company officials said they hoped the sale would help the 512-unit chain “restructure its debt and shore up its balance sheet.”

The news marked a pretty drastic change in events for the company — back in the fall of 2021, Mod Pizza was rapidly expanding and laying the groundwork for a potential IPO.

However, it’s not alone in its struggles. In fact, Mod’s descent into distressed territory is emblematic of a growing trend in the restaurant sector, which has seen several borrowers succumb to bankruptcy in recent months.

Others include seafood chain Red Lobster, which filed for voluntary Chapter 11 protection in May. The company, which was struggling with unprofitable leases and cash loss from its unlimited shrimp offering, abruptly shut down 93 of its US locations before filing and warned that it could close over 100 more (including its flagship Times Square location in Manhattan).

That same month, California-based Mexican food chain Rubio’s Coastal Grill also filed for bankruptcy protection after its profits were impacted by high labor costs.

Like Mod Pizza, Rubio’s operates in the fast-casual segment of the restaurant industry, which is widely considered to be cheaper and more “recession-proof” than sit-down concepts like Red Lobster.

Just last year, debt investors seemed to have an increasingly positive view on fast-casual restaurants, with debt refinancing deals from companies like drive-thru chicken chain Raising Cane’s and Burger King owner Restaurant Brands International pricing tight to talk.

But the growing amount of fast-casual chains filing for bankruptcy this year paints a different picture. So, what’s changed since then? Let’s dig into it:

In early 2023, high prices were still driving budget-conscious consumers into quick-service chains like Mod Pizza and Rubio’s.

At the same time, the cost of food commodities like chicken was also starting to drop from post-pandemic highs, which helped boost earnings for borrowers like Whataburger, which reported a sharp 50% year-over-year increase in EBITDA in Q2 23.

However, as recent restaurant bankruptcies (and our research on the sector, available on 9fin) highlight, the picture has become bleaker even for fast food chains.

One of the largest reasons for this is the rising cost of labor, according to a turnaround advisor. This is especially true for operators with a large presence in California, which increased its minimum wage rate for fast food workers at chains with 60 or more locations to $20 per hour earlier this year.

In June, Rubio’s, which is headquartered in Carlsbad, California, closed down 48 of its locations in the state due to “the rising cost of doing business” there. The shuttered locations accounted for around one-third of its total store footprint.

“Everyone is concentrated on the labor side,” the advisor said. “If a chain has 60 or more locations, do they suddenly have to close one? These are the discussions going on, but my answer is you can’t, because you need to basically need to continue to expand.”

Instead of closing locations, other fast food chains have opted to raise menu prices instead, which has made it difficult to attract price-sensitive customers. Fast food prices are up over 4.8% since last year, and with credit card debt on the rise, customers are less willing (and able) to absorb the price hikes.

“Dealing with the rising product and labor costs while also trying to pass value onto the consumer is an inherent challenge for operators right now, and those that haven't been able to adjust quickly enough are struggling or even filing for bankruptcy” said Jeffrey Pielusko, a managing director at Carl Marks Advisors.

Against this backdrop, investors on both the debt and equity sides have become increasingly cautious with the restaurant sector.

“I’m pretty bearish on anything in fast-casual now,” said a restaurant-focused private equity executive. “The last three years have been a series of shocks with labor and inflation, so it’s not anything new, but we’re over the edge at this point — where is [consumer] discretionary spending coming from?”

A buyside analyst echoed this sentiment, noting that their firm had worked to limit its exposure to the sector, particularly for higher-price point sit-down chains.

“We’re barbelled on our restaurant exposure and have especially lowered the number of high-end names we’re in,” the analyst said. “Some fast food is still doing well, but anything sit-down is seeing cooled off and earnings declines.”

To that point, some fast food deals have performed well in the primary market this year, but many of them were issued by companies with a large presence in the South, where operating costs are cheaper than the rest of the country.

This was a big selling point for investors looking at Taco Bell franchisee Tacala’s term loan refinancing deal earlier this year. The Alabama-based borrower priced its $725m term loan due 2031 tight to talk at SOFR+400bps with a 75bps floor and a 99.75 OID in January, and the facility has traded up slightly since then, with most recent quotes coming in at 100.48.

Texas-based burger chain Whataburger also had a smooth ride in the primary market with its debt repricing deal in May, and was even able to tack on a fungible add-on to redeem the remainder of its preferred equity. The deal priced at the tight end of its revised talk at SOFR+275bps with a 50bps floor at par and is currently quoted at 100.23.

But while some pockets of the restaurant sector appear to be faring better than others, Pielusko said lender anxiety is still up for the sector overall.

“Anecdotally, we've been talking to more of our relationship lenders about [restaurants] that aren't performing to plan,” Pielusko said. “Lenders in the space went from terrified during the pandemic, to pleasantly surprised when they bounced back in 2022, and now with consumers seeming to pull back, anxiety has ticked back up again.”

For more content within the food service industry, check out our coverage of Red Lobster.

Distress is on the menu for more restaurant borrowers

Kartikeya Dar

Clearlake moves to shun loan-to-own investors in Pretium Packaging

Swapnil Sawant

A look at distressed: New Fortress Energy, strategic assets and multiple ‘dips’

9fin team

Webinar — Navigating the shifting sands of LME transactions: Balancing leverage and litigation risk

High yield chicken shops, reviewed and rated

Save time, react faster to news, outperform your peers.

Asset Managers & Hedge funds

Save time, pitch more efficiently, and win business.

Investment Banks

Turbocharge your trading desk P&L, with the market's fastest news alerts.

Sales & Trading

Spot novel covenants, save time drafting and win business.

🍪 Our Cookies

Distress is on the menu for more restaurant borrowers

Read all our public content for free

Recently Published

Clearlake moves to shun loan-to-own investors in Pretium Packaging

A look at distressed: New Fortress Energy, strategic assets and multiple ‘dips’

Webinar — Navigating the shifting sands of LME transactions: Balancing leverage and litigation risk

High yield chicken shops, reviewed and rated

What are you waiting for?