Garden Fresh Restaurant Corp: May File Bankruptcy

Garden Fresh Restaurant Corp owns chains like Souplantation and Fresh Tomatoes and commisary kitchens. Most of the food offerings are in a buffet format and that’s a problem with Covid-19. As a result, the private equity owner of the company is preparing to file for bankruptcy, after losing $1mn a week trying – unsuccessfully – to make its model work. The company had $250mn in sales before the current crisis.

This is bad news for the only BDC with exposure: Ares Capital (ARCC). The BDC giant has $20.0mn invested in the first lien Term Loan of the company. That debt was on non accrual for the first time in the IQ 2020 results, and written down (45%). The quarter before the debt was valued at par and ARCC was collecting close to $2.0mn in annual investment income.

We’ve downgraded the company in one fell swoop from CCR 2 to CCR 5. We have little expectation that the company will be making a comeback or that ARCC – whose position is relatively small by its standards – would be interested in a debt-for-equity swap in this situation. The principal remaining question is what the company is worth – if anything. We won’t guess, but will circle back when a more tangible resolution has arrived.

We’re surprised that ARCC would have involved itself with either the sector (even before Covid-19) or the company, which has a history including filing for bankruptcy previously, resulting in major losses for other lenders. The restaurant business is famously difficult to lend to due to its narrow margins; changing consumer tastes; high fixed costs and – now – virus concerns. Nor is the first lien status of ARCC in the capital structure any protection against loss. A reminder that even the biggest – and in the mind of some one of the best credit underwriters out there – BDCs can make mistakes.