According to a new report from Debtwire, Red Lobster is exploring strategic options after facing “unprecedented challenges resulting from the COVID-19 pandemic.” The casual chain engaged adviser Guggenheim, sources familiar with the situation told Debtwire.
Red Lobster is dealing with earnings pressure and near-term maturities. It has a $380 million term loan coming due in July 2021.
As of February 23, Red Lobster had about $216 million of unrestricted cash, Debtwire said.
In March, Moody’s Investor Service downgraded its rating of Red Lobster to Caa1 (poor quality and high credit risk) and handed it a negative ratings outlook. It also downgraded Red Lobster’s senior secured bank credit facility to Caa1.
“In addition, prior to the impact of COVID19, Red Lobster faced challenging operating trends, particularly traffic,” Moody’s wrote its rationale.
William Fahy, VP senior credit officer for Moody’s, told SeafoodSource in May that Red Lobster’s focus on seafood would pressure the chain heavier than competitors. The company forecasted in March that operating profit for the entire industry could decline 10 percent to more than 20 percent in the coming year.
In June, Red Lobster had reopened a sizable set of dining rooms, with to-go operations in place at all locations, the company told FSR earlier.
Red Lobster had nearly $2.5 billion in U.S. sales in 2019—a 2.1 percent year-over-year decline. It also dipped to 670 restaurants from 675, according to FoodserviceResults. Average-unit volumes fell to $3.494 million from $3.550 million. The sales figure put Red Lobster at No. 10 in this year’s FSR 50 ranking of the country’s top-grossing full-service chains, ahead of The Cheesecake Factory, LongHorn, and Red Robin.
In a June 3 credit opinion, Moody’s noted Red Lobster benefited from its adequate liquidity position with significant cash balances that plug any near-term cash-burn deficits. The outlook also took into account the negative impact on consumers ability and willingness to spend on eating out until the crisis materially subsides.
“Restaurants by their nature and relationship with sourcing food and packaging, as well as an extensive labor force and constant consumer interaction are deeply entwined with sustainability, social and environmental concerns,” Moody’s wrote. “With Red Lobster’s product offering concentrated toward seafood the company has a well-articulated Seafood with Standards commitment to sustainable, traceable and responsible sourcing of seafood, which more recently includes the elimination of plastics straws throughout its restaurants.”
At the time, Moody’s noted that the maturity of a $150 million asset-based loan was extended to December 31 from June 21.
Golden Gate Capital took Red Lobster private in 2014 from Darden via a $2.1 billion deal. In 2016, Thai Union Group made a $575 million minority investment. The group, known for its “Chicken of the Sea” tuna product, was involved with Red Lobster on the supplier level for more than 20 years.
“Red Lobster’s private ownership is a rating factor given the potential implications from both a capital structure and operating perspective. Financial policies are always a key concern of privately-owned companies with regards to the potential for higher leverage, extractions of cash flow via dividends, or more aggressive growth strategies,” Moody’s wrote.
Golden Gate also directs California Pizza Kitchen, which filed for bankruptcy last week.
Debtwire said Red Lobster’s term loan has traded higher over the last several weeks. The $380 million Libor plus 525 basis points (1 percent floor) term loan due 2021, is quoted 83/86, compared to 70.25/76.75 on 14 April, according to Markit.