Private Equity-Owned Restaurants: ‘This Is the Worst I’ve Ever Seen It’

Red Lobster, P.F. Chang’s, and the perils of owning food businesses in the age of Covid-19.

Luke Sharrett/Bloomberg

Luke Sharrett/Bloomberg

Private equity-owned restaurant chain Red Lobster has posted an “coronavirus alert” on its website informing customers how dramatically its operations have changed in a short time.

“The Covid-19 pandemic continues to be an unprecedented and extremely serious situation that has significantly changed the way we are able to operate, including federal, state and local mandates for quarantines and bans or limits on in-restaurant dining,” Red Lobster said on its website. The company, owned by private equity firm Golden Gate Capital, said it made “the incredibly difficult decision to temporarily close certain restaurants” while keeping others open for take out, delivery, and “curbside pickup.”

The restaurant industry has been hit hard by fears over the rapid spread of Covid-19, the disease caused by the coronavirus. Many companies in the sector, including private-equity-owned P.F. Chang’s China Bistro, were already under pressure before the virus prompted communities to shut down, according to William Fahy, a credit analyst with Moody’s Investors Service.

“This is the worst I’ve ever seen it,” Fahy said Monday in a phone interview. “How long are you able to sustain 80 percent of your business going away until it comes back?”

Moody’s lowered Red Lobster’s credit rating to Caa1, or seven levels below investment grade, on March 27. That same day, the firm cut the rating of P.F. Chang’s parent Wok Holdings, owned by TriArtisan Capital Advisors and Paulson & Co., to Caa2.


A spokesperson for Golden Gate declined to comment, while spokespeople for Paulson & Co. and TriArtisan did not provide comment by the time of publishing.

Companies in the restaurant industry have been borrowing from their credit lines to weather the sudden drop in business, according to Fahy. They’ve also been negotiating with landlords to defer their rental payments for a few months, he said, hoping that by then business will have returned to normal. Then there are the interest payments due to debt holders.

For now, Red Lobster has “significant cash balances that will support its near-term free cash flow deficits,” according to Moody’s. Still, the credit rater said the company has “very high leverage and modest interest coverage” and it’s facing a debt maturity next year for its $380 million term loan.

Even before the coronavirus concerns, Red Lobster faced “challenging operating trends,” particularly with traffic, according to the report. The chain, with more than 700 Red Lobster seafood restaurants throughout North America, produces more $2.4 billion of annual revenue, according to Moody’s.

“Where we are open, we are currently offering a limited To Go menu, and you may experience substitutions, such as Cornflake-Crusted Shrimp for Walt’s Favorite Shrimp,” the seafood chain said on its website. “These decisions have not been taken lightly and are extremely painful, but we are hopeful that our efforts will enable us to survive and ultimately re-open our doors when this crisis ultimately passes.”

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Dave Albrycht, president and chief investment officer of debt investment firm Newfleet Asset Management, said Monday by phone that the restaurant sector is among the areas he’s avoiding.

“I don’t think any company in the United States was structured on the thought that you would have zero revenue for a month to three or four months,” said Albrycht. “Are you going to run out and go to the restaurant the day this is over?”

The number of Covid-19 cases in New York, the epicenter of the coronavirus crisis in the U.S., has continued to soar. The state’s non-essential workers will continue working from home for another two weeks through April 15, New York governor Andrew Cuomo recently ordered, while the coronavirus continues to spread across the U.S.

Meanwhile, P. F. Chang’s, which produces about $900 million in annual revenue, will be hurt by efforts to contain the virus, according to Moody’s. The casual dining chain, acquired last year by TriArtisan and Paulson & Co., faces a “material deterioration in earnings and credit metrics along with free cash flow deficits that are driven by the restrictions and closures,” the credit rater said in the March 27 report.

Other private-equity-owned companies in the restaurant industry have struggled before the pandemic, including California Pizza Kitchen and Checkers Holdings.

For example, Golden Gate Capital-owned California Pizza Kitchen is rated at Caa1, the same level as Red Lobster. In an August report, Moody’s said the company was constrained by “high leverage, modest interest coverage, small scale and geographic concentration relative to comparable casual dining concepts.”

Checkers, a quick-service restaurant business owned by Oak Hill Capital, was rated at Caa2 in September. Moody’s said in a report at the time that the company, which operates under the brand names Checkers and Rally’s Hamburgers, had a “weak liquidity profile.”

An Oak Hill spokesperson did not immediately respond to an email seeking comment, while a phone message left in the private equity firm’s general mailbox went unreturned.

The coronavirus is taking a toll across the restaurant industry, including businesses large and small, according to Fahy. “You’re going to have restaurants that won’t survive,” he said.