Wimpy owner Famous Brands warned it may breach agreed debt commitments with lenders, and is in talks with its primary banker about adjusting its debt maturities, underscoring severe distress in an industry felled by the government’s order to stay at home to curb the Covid-19 pandemic.
Famous Brands, a major player in the industry with household brands such as Mugg & Bean and Steers, recently secured a R300m short-term debt facility as part of measures that include closing dividend taps and scaling back on capital expenditure to meet its financial obligations in the “foreseeable future”.
But with some restaurant chains only serving food on a delivery basis, deprived of sit-in customers who would normally order a glass of wine with burger meals, the company said it is likely to breach the agreed debt covenants in the 2021 financial year.
Famous Brands, whose net debt surged more than 50% to R2.6bn in the year to end-February partly due to accounting standards, has made a commitment to lenders to keep the ratio between net debt to core profit — or earnings before interest, taxes, depreciation and amortisation — at less than 2.5 times.
The company reported just more than R900m in operating profit, excluding non-operational items.
A violation of the covenants means lenders would typically invoke their rights to demand immediate payment of the loans.
“In light of the anticipated challenging economic environment triggered by the Covid-19 global pandemic, management has proactively engaged with the group’s primary lender to restructure the future debt maturity profile and debt covenants,” Famous Brands said.
It was done as “the group is likely to breach the covenants requirements for the year ending February 28 2021 as these were agreed in a pre-coronavirus environment”.
The talks are positive, it said in the earnings report, which showed it had returned to a profit of R426m as it recovered from writedowns of its struggling UK Gourmet Burger King business.
Famous Brands also said, unusually, SA business had felt more pressure than normal in the year-end to February as consumers felt constrained, but the affordable takeaway brands were doing better than sit-down restaurants such as Mugg & Bean.
CEO Darren Hele said that the financial year 2021 will be clearly characterised by Covid-19. “Unsurprisingly, we don’t anticipate achieving any of our original budgets of any month in this financial year.”
Restaurants cannot operate at full capacity until SA exits the lockdown, and will be hard hit with months of severely reduced income.
About 56% of its 1,546 takeaway stores Debonairs and Steers traded during stage 4 but only 4% of 737 Mugg & Bean and Fego Caffe coffee shops, or about 30 stores offering delivery.
In level 3, expected to start in June, it estimates that it will earn 35% of revenue with 70% of businesses able to trade somewhat through delivery and takeaways.
Famous Brands has already announced it expects a full impairment of its UK investment in Gourmet Burger King, which it had expected to turn around before the coronavirus pandemic hit. It said in March it would not spend any more money on this business and said on Tuesday it had rejected UK government support.
It is, however, planning to slowly open 19 of its GBK stores to offer deliveries in England — about three a week.
It says in SA casual dining including Mugg & Bean and other restaurants of Turn n Tender “will only reopen once the Covid-19 global pandemic has subsided. This has a significant negative impact on our business.”
Its share price rose 2.97% on Tuesday to close on R35.01.
Correction: May 27 2020
In an earlier version of this story we incorrectly stated that Famous Brands' financial year-end was June. It is in fact, February.
With Tiisetso Motsoeneng
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