York Capital's Houlihan's went from leveraged buyout to Chapter 11 in three years

In November 2019 Houlihan's Restaurants, the Leawood, Kansas-based casual dining chain, filed for Chapter 11 protection in Delaware along with more than 30 affiliates. Landry's, Tilman Fertitta's Houston restaurant group, quickly offered $40 million plus assumed liabilities as the stalking-horse bid, with the sale expected to complete by year end.

The chain had been bought about three years earlier by affiliates of York Capital Management with the help of a secured credit line of more than $50 million. By the filing, Houlihan's listed about $80 million in assets against $77 million of liabilities, and had not paid interest to its lenders since December of the previous year.

Chief restructuring officer Matthew Manning's court declaration blamed the collapse on changing consumer preferences, senior management changes, unfavourable leases and the rapid growth of costly third-party delivery services, compounded by an ill-timed buyout of the chain's largest franchisee in May 2018. In the run-up to Chapter 11 the company closed 12 money-losing locations after failing to get concessions from landlords.

The company reported $202 million of revenue for fiscal 2019 and about $9 million of EBITDA. Restaurant consultant Darren Tristano put it in the broader casual-dining slump: 'For over 10 years these concepts have really not differentiated themselves. Their menus appear to be very similar.' The filing let Houlihan's keep its 47 restaurants in 14 states — plus 23 excluded franchises — running, keeping 3,450 staff employed through the sale process.

The 2016 leveraged buyout layered secured debt onto a chain already losing its differentiation.

Third-party delivery commissions took a growing cut of thin restaurant margins.

Unfavourable leases on underperforming locations could not be renegotiated, forcing 12 closures.

Buying its largest franchisee in May 2018 added pressure right as cash ran short.

A leveraged buyout of a casual-dining chain needs either sharp differentiation or deep pockets: delivery commissions and unfavourable leases eat both.

Landry's $40 million stalking-horse offer set the floor for the bankruptcy auction, with the sale expected to complete by the end of 2019 and lenders including CIT Bank providing $5 million of financing to keep the chain operating.