Tag Archives: going concern

SHAKE SHACK (SHAK) RAISES $75M OF EQUITY – BANK COVENANT “CONCERNS”

articles, , , ,

SHAKE SHACK (SHAK) RAISES $75M OF EQUITY – BANK COVENANT “CONCERNS”

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

RESTAURANT INDUSTRY – SHORT COMMENTARY – THE “MICRO” meets the “MACRO”

articles, ,
RESTAURANT INDUSTRY SHORT COMMENTARY – THE “MACRO” meets the “MICRO”.
I haven’t written much in the last two weeks (seems a lot longer), because there is not much any one individual can add to the 24/7 conversation in the news. It is amazing how many commentators, who are presented as “authorities”  have no credentials better than yours or mine. many of which even have a particularly  poor success record. Brings to mind what Yogi Berra said: “Predictions are tough, especially about the future”.
Relative to the restaurant industry:
It’s normally about day to day execution, the “micro” side of things. You’re only as good as the last meal you served.  These days, it’s all about worldwide health trends and “macro” financial considerations.
FWIW:
(1) There will be no V shaped recovery. While there will be a “recovery” from the disastrous current situation, as the “cabin fever” breaks, consumers will still be traumatized. I will be happy  to get out again, but I’m not going to eat three times as many meals to make up for those I missed. Our parents remembered the depression for their lifetimes. This is a shorter term event, but won’t end all it once. Economic and health concerns will still be with us.
(2) Yesterday we read an 8-K  filing by Dave & Buster’s (PLAY)(in which I have no current position)  that included reference to “going concern considerations”.  The Company has received a waiver from their lender, allowing PLAY to have a “qualified opinion” from their auditor. As the filing says “The Company currently anticipates that its financial statements will contain disclosures indicating substantial doubt about the Company’s ability to continue as a going concern as a result of the events occurring after February 2, 2020.”
We do not point this  as a negative for PLAY, in particular, who are apparently now negotiating for additional equity. There are now thousands of businesses, worldwide, that are not “going concerns” under current circumstances and with the lack of visibility. It will be commonplace for companies that have not yet finalized year end audits to have audit opinions qualified by “going concern” considerations. It will also be commonplace for waivers to be given by lenders, who have lots of other things to do rather than run these businesses. Their “workout” departments aren’t nearly big enough. All of these financial adjustments, for almost all companies,  will not be a source of comfort to investors.
“Moratorium” is becoming the operative word. Salaries, rents, and mortgage payment relief have increasingly been discussed over the last couple of weeks. For the first time, this morning we heard the Bank of America CEO suggest that mortgage obligations over the next 3-6 months be “suspended” and added to the end of the mortgage. The domino effect of a restaurant not paying rent is obvious. The landlord has a mortgage to pay, and the lender has its own financial obligations. Everybody can’t be covered, and we will likely  go through some sort of a “force majeure”, though it may be piecemeal and unstated. There are going to be multi-trillion dollar inefficiencies, and this will last for years. It ought to be inflationary, but who can tell?  Read our “Semi-Monthly Fiscal/Monetary Update that we published yesterday.
(3) ON A POSITIVE NOTE: Nobody knows how this plays out, or the timing. There were huge changes in our life after 9/11, airport security being the first to come to mind. There will be similar adjustments after this crisis. It’s is easy to suggest  that nobody will ever sit in the middle seat on an airline. When will Cheesecake Factory or Olive Garden be packed again? Seems like never. HOWEVER: less than twenty years ago, we watched people jump off the WTC buildings to save themselves. Who would believe that those tower “targets” would be replaced and that companies would locate on the top floors. LIFE WILL CHANGE, BUT NEVER SAY NEVER!
Roger Lipton