Krystal files for Chapter 11 protection

April 2020 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

April 2020 Issue

Fast food restaurant chain Krystal Company filed for Chapter 11 bankruptcy protection in January, citing debts of between $50m and $100m.

The company, which filed its petition in the bankruptcy court in the Northern District of Georgia, listed 30 unsecured creditors, with the largest being The Tombras Group media agency at $4.2m. At the time of the filing, Krystal employed 4890 employees in restaurants across at least nine states, including Georgia, Tennessee, Alabama, Florida, Kentucky, Mississippi, North Carolina, South Carolina and Arkansas.

“Both company operated and franchised Krystal restaurants will remain open and operating as usual and our customers can expect to continue to enjoy the same great food and service that they have come to expect from us,” the company said in a statement announcing its filing. “The actions we are taking are intended to enable Krystal to establish a stronger business for the future and to achieve a restructuring in a fast and efficient manner. We are pleased to be ready to move toward a brighter future for the brand and have the support of our stakeholders.”

“Shifting consumer tastes and preferences, growth in labour and commodity costs, increased competition, and unfavourable lease terms” were cited by Jonathan Tibus, Krystal’s chief restructuring officer, as driving factors behind the company’s bankruptcy, in a court filing. Mr Tibus also mentioned “the proliferation of fast casual restaurants as well as online delivery platforms” and “increasing difficulty finding and retaining qualified employees in the current labour market”.

The bankruptcy filing, the company’s second in 23 years, was the latest stage in Krystal’s attempted restructuring. In November, the company announced a management shakeup which saw both its then-president and chief executive Paul Macaluso and chief financial officer Berry Epley leave. Industry veteran Tim Ward was appointed president and chief operating officer. Bruce Vermilyea was named chief financial officer.

Krystal, the second oldest fast food chain in the US, has also recently announced a restructuring of many of its restaurants. In October, the company said it planned to refranchise between 100 and 150 of its company-owned restaurants. Krystal has engaged The Cypress Group, a specialised investment banking firm, to manage the initiative. Prior to the filing, Krystal had 318 restaurants, 202 of which were owned by the company and 116 were franchised. The company also recently closed 25 restaurants as part of a strategic plan to close underperforming units and “reposition resources to support other Krystal locations”. Over the last year, Krystal has closed 44 locations.

Owned by K-Square Restaurant Partners LP, Krystal received an investment of $59.8m in April 2018, which it used to repay $42m of loans, fund “substantial remodelling” of its restaurants and make other investments, such as marketing, according to a court filing. The company has been experimenting with a new, smaller store format which it has credited with boosting sales. In October 2019, the company noted that the nine locations it rebuilt generated an increase in first year-over-year comp sales ranging from 29.8 percent to 107.5 percent for the periods each had been open.

The company first filed for bankruptcy in 1997 due to millions of dollars of employee claims for unpaid overtime. Krystal was acquired from bankruptcy at that time by Port Royal Holdings in a $145m deal. The company moved its corporate headquarters from Chattanooga, Tennessee, where it had been based since 1932, to Atlanta in early 2013 after it was acquired by Argonne Capital Group for an undisclosed amount.

Richard Summerfield