DC Advisory
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A lifetime ago, on April 3rd, we wrote an article “MICRO meets MACRO”. Among other things we talked about the new “going concern” language in Dave & Buster’s (PLAY) most recent filing. It wasn’t a particular knock on PLAY, more a commentary that the whole world has taken on going concern considerations. Since then, on April 14th, PLAY raised $75M of equity and amended their bank covenants.  In the case of PLAY, with the current valuation, that amounted to about 20% equity dilution.

Shake Shack (SHAK) today announced a $75M equity offering. The good news is that this only amounts to about 6% equity dilution, since SHAK still has a valuation above $1.5 billion. This additional equity provides SHAK with total liquidity approaching $200M, which should tide them over for a while, considering that the weekly burn rate, as they described it this morning, is $1.3-$1.5M per week.  There is more to the release, which you can read elsewhere, describing the current situation relative to store closures and the decline in sales as the pandemic rolled through their system.

For our purposes this morning, we thought readers would find interesting the following language from their 8-K filing. We present this information not as a particular negative for SHAK, since this kind of filing is likely to become the norm rather than the exception. We want our readers to know what to expect as more companies come public with adjustments to their business plan.

Quoting this morning’s 8-K filing: (Bold Italics are ours.)

“As previously disclosed, on August 2, 2019, we entered into a credit facility with Wells Fargo Bank, National Association (“Wells Fargo”), providing for a $50.0 million senior secured revolving credit facility with the ability to increase available borrowings under the credit facility by up to an additional $100.0 million through incremental term and/or revolving credit commitments, subject to the satisfaction of certain conditions set forth in the facility. In March 2020, we drew down the full $50.0 million available to us under the credit facility…. as a result of the COVID-19 outbreak. We are required to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios, in addition to other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business. As of December 25, 2019, we were in compliance with all covenants. However, as a result of the COVID-19 outbreak, our total revenues have decreased significantly and we have implemented certain operational changes in order to address the evolving challenges presented by the global pandemic on our domestic and licensed operations. While we expect to be in compliance with the financial covenants for the first quarter, due to the impacts of COVID-19, our financial performance in the first quarter was, and in future fiscal quarters will be, negatively impacted. As a result, it is likely that we will be unable to continue to comply with certain covenants contained in the credit facility, potentially as early as the second quarter compliance date. We are in discussions with Wells Fargo regarding potential modifications to our covenants, and/or temporary waivers, but there is no guarantee that we will be able to reach any such agreement. A failure to comply with the financial covenants under our credit facility would give rise to an event of default under the term of the credit facility, allowing the lenders to refuse to lend additional available amounts to us and giving them the right to terminate the facility and accelerate repayment of any outstanding debt under the credit facility. As a result, we may need to access other capital to address our liquidity needs rather than relying on our credit facility. As of April 16, 2020, we had approximately $112.0 million in cash and marketable securities on hand, excluding foreign currency and certain reconciling items such as deposits in transit. Our cash resources and liquidity would be substantially impaired by an acceleration of the debt under our credit facility.”

We expect that the banks will have been made comfortable by the $75M of new stock sold by SHAK, and, just as with Dave & Buster’s, covenants will be waived and adjusted. The commercial banks don’t want to run the stores. The good news for SHAK is that much less equity dilution is involved than was the case at PLAY. However, it’s a new world. All of this is becoming commonplace. Almost everyone, in and out of the restaurant industry, will be spending a great deal more time negotiating with bankers.

Roger Lipton