Food Gone Bad

I'm going to kick off my blog by discussing restaurants for a few posts because the industry is close to my heart. Between 2009 and 2011 when the high yield index experienced a deluge of new restaurant bonds, I did a thorough analysis of the sector and really enjoyed learning about it.

Let's start with Quiznos. Admittedly, I've never looked deeply into the sandwich maker's financials, but the restaurant chain has been in the news because of its recent bankruptcy filing. 

"Plummeting sales and piling debt has forced Quizno’s Corp. to file for bankruptcy protection. The Denver-based sandwich chain known for their oven toasted subs is reportedly $570 million in the red, but will continue operations during its bankruptcy process...

According to company officials, Quizno’s will attempt to implement a $400 million debt cutting plan. Just two years ago, the oven toasted sandwich chain reached an out-of-court agreement with creditors that cut its debt at the time by more than a third...

A Chapter 11 bankruptcy filing would help Quizno’s handle its leases as well as loan money to franchisees for store improvements and advertising. Although, the company is facing incredible competition as its main rival, Subway, has more than 35,000 more stores. Likewise, Subway’s $5 foot-long sandwiches have helped put a fork in Quizno’s fate.

Under Quizno’s proposed restructuring plan, first-lien lenders would receive a recovery of about 43 to 53 percent, but unsecured creditors may recover all of their claims or possibly none at all.100 percent of Quizno’s first-lien lenders voted and accepted the proposed plan. Those lenders who voted make up about 88% of the principal amount of outstanding debt. As mentioned, though, unsecured creditors may not receive anything and the largest of those unsecured include a $173.8 million second-lien financing facility."  News Channel Daily

A few things have struck me about this filing: 

1) The company itself only owns and operates 7 out of 2100 stores total! The rest are owned by franchisees. 

2) Recovery for 1st lien guys will be 43 to 53 cents on the dollar, which is much lower than historical averages of around 80 cents. And NOTHING for unsecured lenders? That's rough.

3) The company just restructured in 2012. The unsecured lenders have a claim on any proceeds from a lawsuit pertaining to the previous restructuring. 

Since the company doesn't actually own and operate most of the stores, there doesn't seem to be much of an operational turnaround story here. It's not like when Outback had to restructure so it tried to cut its raw materials costs. Quiznos, like all other franchisers, just skims off the top of the franchisees sales. Which begs the question, why have sales per individual stores taken such a nose-dive? Since the problem is spread across hundreds of franchisees, is it the business model or the value proposition to the customer? It's obviously a top-line issue because margins don't even enter the equation when it comes to franchise royalties. Was it similar to the Burger King pre-3G situation where stores haven't been remodeled forever and corporate didn't mandate it?

Additionally, I wonder what went wrong with the previous restructuring? And what was the narrative supporting such high levels of debt to begin with, especially if the cap-ex is funded by the franchisees?

I'll have to do a little more digging.