Photograph courtesy of Steak ‘n Shake

Moody’s Investors Service downgraded Steak ‘n Shake’s credit rating on Wednesday, warning that the company risked defaulting on its loans following a “troubled” buyout of part of its own debt.

The Indianapolis-based chain, owned by San Antonio-based Biglari Holdings, apparently acquired part of its own term loan at a discount, which Moody’s and rating firm S&P Global saw as a sign of distress.

Steak ‘n Shake is looking to refinance its loan, which is focused on reducing capital spending and non-core operating expenses, according to Moody’s.

But that could be a problem. S&P warned that “the recent coronavirus outbreak in the United States will limit prospects for conventional refinancing.”

Steak ‘n Shake “will face extreme challenges” to refinance its loans “given the significant deterioration in earnings, cash flow and credit measures by restrictions and closures of its restaurant base due to the efforts. to contain the spread of the coronavirus, ”Bill Fahy, Moody’s senior credit officer said in a statement.

Steak ‘n Shake is hardly the only restaurant chain to have faced credit rating downgrades following the coronavirus shutdown. With the industry facing huge financial damage from limiting or outright shutting down so many locations, chain credit metrics fell precipitously.

But Steak ‘n Shake was one of many chains facing major question marks before the coronavirus shutdown, and the associated issues only made matters worse.

The company had already closed 107 of its 368 corporate restaurants, with plans to reopen at least some of them in a countertop model; the chain is generally a full service, but with a drive-thru. The franchisees operate its remaining 242 locations.

Same-store sales of Steak ‘n Shake have deteriorated over the past three years, including a 6.9% drop in 2019. Traffic, meanwhile, plunged 11.2%.

The company reported an operating loss of $ 18.6 million, higher than the loss of $ 10.7 million the previous year.

The losses had put pressure on the company to give it a $ 181.5 million loan that would expire next year, a deadline that served as a sort of deadline for the chain to work out its problems. .

The parent company Biglari Holdings does not guarantee this debt. Steak ‘n Shake was considered a prospect of bankruptcy because of its operating losses and this due date. Indeed, Moody’s said, Steak ‘n Shake’s credit was limited by its high leverage “and an inability to even partially cover interest charges before the impact of COVID-19.”

It is not known to what extent the coronavirus shutdown impacted Steak ‘n Shake, although its drive-thru likely offers considerable protection against the slowdown experienced by many other full-service chains.

Yet, said Fahy, “While many quick service restaurants are able to provide drive-thru and delivery service, restaurant sales will always be well below normal operating levels. “

Moody’s noted that Steak ‘n Shake is supported by “strong brand awareness in its core markets and a relentless focus on value that has historically driven comparable store sales.”

S&P downgraded Steak ‘n Shake to “SD” or “Selective Default” on April 1 before upgrading it a few days later. Still, he cited the chain’s “significant debt burden” even after the takeover, as well as “massive short-term disruption to the restaurant industry” due to the pandemic.

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