Portillo Holdings: Downgraded

Restaurant operator Portillo Holdings has been struggling with huge sales declines associated with you know what. Now, the company has to contend with (justified) downgrades from the rating agencies. S&P has given Portillo a CCC rating with a “negative outlook”. That’s down from B-. Moody’s has arrived at a similar conclusion in late March. Liquidity is a problem along with high leverage and the outlook for sales, even after re-opening, is weak. A restructuring is likely and an “ad hoc” group of lenders is already in negotiations with the company.

There is just one BDC lender to the company: Ares Capital (ARCC). Worryingly, the $32.9mn at cost in the 2024 loan is second lien. At year end 2019, the BDC was carrying the loan at a premium to par, shortly after initiating a relationship in the IVQ 2019. That’s likely to change next time we see a valuation from the BDC. We expect a (10%)-(20%) discount, but these are early days. A second lien loan in a company on the front lines of the current crisis – and which is talking restructuring already – implies we could see an ultimate much bigger loss, and possibly a debt-for-equity swap. There is about $3.5mn of investment income in play, as well.

Expect to see an update sooner rather than later given the fast moving situation and the company’s pressured liquidity. We have added the company to our underperformers list and leapfrogged the credit rating from CCR 2 to CCR 4. We expect to see many more leapfrog credits in the weeks ahead. We’re not yet ready to add Portillo to our Weakest Links list of companies likely to go on non accrual soon, but that could change.