Too much debt and weak cash flows could cook up into loan defaults for quick-service and family restaurant companies, according to sector analysts. "The entire industry, whether fast food, family-style, or casual, has been hurt by the economy [and] unemployment," said Jerry Hirschberg, a Standard & Poor's analyst. "Fast food and family dining has been hurt more than anyone else," he added.
In danger of violating agreements on the timely filing of financial reports, AFC Enterprises had to amend its credit covenants with J.P. Morgan, giving the fried chicken and cinnamon bun retailer an extension on the filing deadline for its annual report until Oct. 31. Gary Hunt, AFC's cfo, said the company hopes to meet the deadline, although it has yet to set a date for the filings. If the company is unable to make the deadline, "We would probably wind up going back for another amendment from the lending group," Hunt said. This is an unsavory option, considering the 50 basis points that were added onto the pricing of AFC's $275 million facility as a condition of the most recent amendment. "No company wants to pay any higher rates than they have to," admitted Hunt.
Denny's Corp.'s $125 million revolver, led by J.P. Morgan, was recently downgraded to CCC+ from B- by S&P. The immediate solution for Denny's, said Hirschberg, should be to free up cash to service the debt. "Or they can try to arrange some sort of outside financing with their banks and try to get their banks to get a little more lenient on their covenants," he said. Kenneth Jones, v.p. and treasurer of Denny's, did not return calls. Other companies in a pickle are American Restaurant Group (CCC+), Mrs. Fields (CCC), Piccadilly Cafeteria (CCC-) and Avado Brands (CC), according to Hirschberg. All will need "a combination of better business and understanding by their banks" as they wait for the economy to improve, he said. Officials at the companies did not return calls.
But the picture is not all bad for the industry. "The economy is showing slow but steady improvement, so I would expect the fortune of fast foods companies to get better," said Mark Kalinowski, a restaurant analyst with Citigroup. He said tax rebates, improved weather and lower gas prices would all be a boon for fast food companies. "Probably the worst is over," agreed Hirschberg. "It doesn't mean that they are out of the woods though," he said, adding that interest rate increases could cause further problems for the debt repayment abilities of struggling companies. "Any cash flow that they have will be eaten up by higher rates," he said.