Problems for TGI Fridays’ U.K.-based operator keep getting worse.
Hostmore, which operates 87 units of the casual dining chain in the United Kingdom, said on Wednesday that it will file for administration—the British equivalent to filing for bankruptcy.
The reason: The company doesn’t believe it will be able to sell its restaurants at a price high enough for it to pay down debt.
“Unfortunately, all of the board’s efforts to implement a lasting solution to support the long-term financial future of the business against a highly challenging trading and macroeconomic backdrop, and efforts to create value for shareholders through the proposed acquisition of TGI Fridays, while well-advanced, encountered adverse events outside of the board’s control,” Hostmore said in a release posted to its website.
It was quite a turn of events for the company. Hostmore earlier this year agreed to pay $220 million to buy Fridays, which had been looking for a buyer for years.
That deal was delayed as the two companies decided to sell their restaurants to pay down debt. But that plan was scuttled after a trustee terminated Fridays’ management agreement—effectively giving control of most of the company’s assets, notably its franchise business, to a consulting firm.
It was the first such manager termination of a whole business securitization (WBS) since the Great Recession, and is believed to have been the only such termination of a franchise restaurant WBS.
A whole business securitization uses a company’s assets, typically royalties paid by franchisees, to back bonds sold to investors. The mechanism provides protections that ensure bondholders are paid first, even if a company were to file for bankruptcy.
Hostmore canceled the deal because it wanted to buy the franchise, not the restaurants.
That left TGI Fridays in limbo. But it has also created problems for Hostmore. The company’s admission that it won’t be able to pay off the debt by essentially selling all its assets sent its stock plunging more than 95% in one day last week.
Hostmore is hardly the only restaurant operator whose business is no longer worth the value of its debt.
Numerous restaurant chains in the U.S. have filed for bankruptcy this year amid profitability and other challenges. In those, and numerous cases settled out of court, investors are buying up debt at a steep discount from lenders. They then swap that debt for equity after no buyers emerge to pay enough to fund that debt.
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