TGI … Bankruptcy? Another restaurant chain contemplates Chapter 11

TGI Fridays is currently attempting to line up debtor-in-possession financing to fund the attempted reorganization. The restaurant chain, which once had over 600 restaurants worldwide, has been closing stores in recent weeks.

The contemplated Chapter 11 filing for TGI Fridays comes on the heels of Chapter 11 filings by Red Lobster and Buca di Beppo restaurant chains and countless other restaurants. Increased labor and supply costs, tightening consumer budgets due to inflation and shifting consumer sentiments coming out of the pandemic have been cited as the most common reasons for the increased filings.

A Chapter 11 is commonly viewed as a “Hail Mary” attempt to save a business.  However, Chapter 11 provides restaurant chains like TGI Fridays with various tools to successfully reorganize:

• Chapter 11 imposes an automatic stay that prevents creditor collection activity and permits a restaurant chain to focus on crafting and implementing a turnaround plan.
• Restaurant chains may utilize Chapter 11 to downsize their operations and close non-profitable stores.
• Restaurants may assume or reject (terminate) leases, thereby permitting them to exit locations with poor sales and high costs.
• Landlords who would normally have significant damage claims for breaches of leases outside of bankruptcy are transformed into general unsecured creditors with claims subject to a cap under the Bankruptcy Code. In other words, landlords may receive pennies on the dollar in bankruptcy for closed locations.
• The Chapter 11 plan confirmation process permits a restaurant to transform secured debt into equity and otherwise clean up its balance sheet.

While Chapter 11 provides a second chance for troubled businesses, it is not an elixir for poor business models. Often, restaurants that successfully emerge from Chapter 11 face further restructuring or liquidation if they cannot increase customer traffic in their locations.