Andy Wiederhorn, the founder and CEO of the restaurant chain collector Fat Brands, surprisingly stood before a heavily-occupied room of investors and observers at the ICR investors conference earlier this month.
We say surprisingly because Wiederhorn did this while his company was in the middle of intense negotiations with bondholders and others over the future of the company he created. Fat Brands in November warned investors that it was in danger of filing for bankruptcy, after the trustee on some $1.3 billion worth of bonds demanded full payment, in effect calling the loan.
The owner of Fatburger and Fazoli’s, Twin Peaks and Round Table Pizza had been sued by franchisees and shareholders. It received not one but three delisting notices from the Nasdaq stock exchange. It was a matter of when, not if, his company would file for bankruptcy.
Yet here he was, at an investor conference, answering questions that someone read from a piece of paper, in front of an audience featuring plenty of skeptics. And then his comments detailed just how big a risk Fat Brands took in 2020 and 2021 when it used a boatload of debt to change the company’s trajectory.
“As we originally issued this debt in 2021 to make these acquisitions, we did it on an unrated basis,” Wiederhorn said at the conference. “Which means there’s no rating agency to put a letter on the debt. There’s no rating quality. Our goal was to get into 2022, post-COVID and post-acquisition binge, and the opportunity we saw to make some acquisitions and get the debt rated, which would lower the cost of debt by about 3%.”
In short, Wiederhorn made a bet. Fat Brands coming out of the pandemic made a series of acquisitions at peak market value, including Johnny Rockets, Global Franchise Brands, Twin Peaks and Fazoli’s.
The combined value of those acquisitions was $900 million, an extraordinary sum for a company that once gave 20% interest on a short-term loan to Sardar Biglari just to fund ongoing costs.
That bet did not pay off.
Those comments, and details from the company’s bankruptcy filing this week, demonstrate just how big a bet Wiederhorn made back then.
The company borrowed at higher interest rates and created a financing mechanism that gave considerable deference to lenders, all in the name of getting deals done. Yet its hope to refinance that debt vanished, which effectively made this week’s bankruptcy filing almost inevitable.
By late 2021, after Fat Brands had acquired its restaurant chains, inflation led the U.S. Federal Reserve to start raising interest rates, which reset how much investors would pay for restaurants.
That both made it more difficult for Fat Brands to refinance its debt, because valuations came down, and it increased the cost of debt even if it could refinance that debt.
In other words, that 3% savings vanished in an instance.
What’s more, the structure of Fat Brands’ securitization financing made it more difficult for the company to pay for stuff.
According to court filings, the company received management fees that did not cover the cost of operating the brands. “The management fees do not cover the operating costs in ordinary industry conditions,” John DiDonato, managing director of Huron Consulting Services and Fat Brands' chief restructuring officer, wrote in a court document. “And, in recent years, industry conditions have been anything but ordinary due to inflation and persistent economic uncertainty.”
Fat Brands’ bankruptcy filing is complex. The company is comprised of 182 different legal entities, according to court records. Five of those were set up to hold the debt for the securitization financing the company used to make its acquisitions.
These days, its debt is massive. It has nearly $1.5 billion in secured debt. By comparison, its brands in 2024 generated $2.3 billion in global system sales. That is an insane amount of debt for a mostly franchised company. All of that has drained the company of cash. It had just $2.1 million in unrestricted cash as of earlier this month.
A lot of companies made bets in 2021. They acquired brands at higher-than-normal multiples, believing that the industry would maintain its growth in the coming years. That, obviously, did not happen, as inflation had something to say about it.
But few companies took a bet this risky.