FOLLOW THE MONEY – 5/15/26
Do not be misled by our government’s version of economic progress, creatively compiled, then echoed by reporters who are more concerned about protecting their “access” than questioning the numbers. The most recent Bureau of Labor Statistics (BLS) Jobs Survey is a good example.
The April BLS Jobs Report beat the 63k estimate, coming through at 155k. Looks good superficially, however: Part and parcel of that calculation is the “Birth/Death” model of new business creation rather than documented jobs, which provided a positive 391k within the 155k result. Recall that this model has proven to be very materially optimistic, with revisions literally wiping out over a year’s worth of supposed gains last year. Even within the typically optimistic BLS report, literally all the gains since December ’24 have been part time rather than full time. Consistently more accurate has been the Household Survey Report, which reported April jobs down by 226k, with an average decline of 343k in each of the first four months of ’26. Relative to consumer purchasing power, the BLS report of average earnings was up 3.6%, essentially matching the Consumer Price Index. Moreover, it’s safe to say that the CPI understates the actual inflation rate if you include food, energy and other daily necessities & the average US consumer remains stretched.
Looking more broadly at the fiscal/monetary situation, the annual deficit is sure to be over $2T in FY 9/30/26, including over $1T of debt interest, tax refunds tied to the Big Beautiful Bill, war/defense spending and tariff rebates. Interest rates have remained stubbornly higher than Trump, Bessent & Co. would like, no doubt due to the huge government refinancing need (over $6T rolling over in a 12-month period with interest rates up 250-300 bp), corporate refinancing needs and foreign governments diversifying from US Dollar denominated assts. Also not to be dismissed is the developing crisis in the private credit industry. It is not a good look when lending institutions restrict investor redemptions, and fresh capital will be hard for the “shadow banking” industry to raise. The “consolidation”, to put it charitably, in the private credit space has a long distance to run. In summary, we see no reason to back away from our longstanding preference for precious metals as a safe financial haven.
FAT Brands’ bankruptcy and dissolution has been a frequently discussed situation within our client base. Their ability to borrow $1.2B, securitized by royalties from franchise systems that could candidly be termed second or third tier in quality. Starting with ownership of the California based Fatburger chain, the Company moved on to buy more substantial brands such as Fazoli’s and Round Table Pizza, culminating in their largest, most promising and most expensive purchase of sports bar chain, Twin Peaks. Considering that Fat Brands, Inc. (FAT) never reported GAAP profits, the question could be asked: “How could $1.2B be borrowed ‘on the come’?” The answer is: Zero percent interest rates for over a decade produce “misallocation of capital”. CEO, Andy Wiederhorn had a big plan and borrowed the money, at 7-8%, “because he could”. Institutions provided the capital, seduced by the huge spread above that of lower risk securities, “reaching for yield” like an unsophisticated retail investor. The acquisitions came fast and furious enough that “Adjustments” were available to distract from short term GAAP losses, and Wiederhorn truly expected higher royalties, as well as a near ter opportunity to reduce interest on the debt by 200-300 basis points. Unfortunately, the macro economy and restaurant industry did not help royalties to grow as projected, interest rates (too soon) rebounded by 300-400 basis points, and the Company’s ability to refinance within their existing lender base could not be facilitated. Today, in bankruptcy, the question becomes what the portfolio of brands is worth. From what we know of the 18 brands, we suspect that the originally owned franchise system, namely Fatburger, could be worth the most. Twin Peaks, the most expensive purchase, for over $350M, at more than 15x Adjusted EBITDA, is worth far less today. We counseled CEO, Andy Wiederhorn, several years ago, that he needed a “star” to manage each of the major brands, with the restaurant industry too demanding to rely on anything less. As Ross Perot personally related over 40 years ago, “Eagles don’t flock. You have to find them one at a time”. Wiederhorn felt he had his eagles, but management left at Fazoli’s, Round Table Pizza and finally Twin Peaks. The last loss, Joe Hummel, who built the 100 unit Twin Peaks system, for whatever the combination of reasons, was likely the costliest. Twin Peaks had been spun off to FAT shareholders in early ’25, briefly had a market value over $700M (with $30-35M of projected Adjusted EBITDA) and was the key ingredient in the portfolio’s potential to be worth in excess of the $1.2B of debt. Hummel’s departure predictably raised concern relative to Twin Peaks within the FAT lending group, just as the tone in the general economy and restaurant industry restrained progress at all brands. As is often the case, the “small print” within lending documents required certain milestones to be met, and includes good faith adjustments under “certain circumstances”. In better times those requirements might not have become “the straw”, but the lenders apparently did not want to hear about “Adjustments” any longer. From Wiederhorn’s standpoint, the lenders became “unreasonable”, and he will apparently be bidding for certain brands. Without researching current information on 18 different brands plus the manufacturing facility, we’re reasonably certain that forward momentum is hard to find. Possibly the current lenders will buy the entire portfolio, selling off parts as they can. We may never know what the ultimate “haircut” proves to be but it rarely pays to reach for yield.
Roger Lipton
