RIP TGI Fridays? Ch. 11 Looms for ABS Case Study

TGI Fridays' prolonged financial struggles may be entering a new chapter, as reports suggest the company is preparing to file for bankruptcy [1].? The impact on the iconic restaurant chain's 2017 whole business securitization (WBS), TGIF Funding LLC, provides structured finance professionals with a rich case study on credit risk, cash flow management, and operational interventions in asset-backed securities (ABS).

Background

When the TGIF Funding LLC transaction was issued in 2017, it looked much like most other restaurant WBS.? Its leverage, cash-trap and early-amortization DSCR [2] triggers were all very similar to those of others. One difference, perhaps telling in hindsight, was the notably smaller number of TGI Fridays stores (903) relative to other restaurant WBS, most of which had at least double that number [3]. Store count speaks to the relative strength, resilience and persistence of the brand, which are important, though somewhat qualitative, credit considerations for WBS.?

Credit Performance and Structural Challenges

The 2017 $450 million transaction, structured to capitalize on TGI Fridays' franchise and royalty revenues, had two classes of notes, each rated BBB and BBB- by Kroll Bond Rating Agency (KBRA) and Standard & Poor’s (S&P), respectively [4,5]. However, performance challenges soon emerged, prompting a series of credit rating downgrade actions.? A short list of these challenges includes:

• Secular decline in Casual Dining: Consumers preferences have shifted away from traditional dine-in experiences towards faster, more convenient limited-service options.
• COVID-19: The casual dining segment was among the hardest hit during the pandemic, accelerating and compounding financial hardship.
• Leadership instability:? TGI Fridays has cycled through multiple CEOs since the start of 2023 challenging the company to establish and follow through on any consistent turnaround strategy.
• Cash mismanagement: $2 million overpayment of a management fee meant for bondholders, and the appointment of a backup manager (see Manager Intervention, below). This overpayment, occurring amid weakened cash flows, highlights a maxim for securitizers - even well-constructed alignment of interests can come under strain when a transaction begins to face performance challenges.

Furthermore, TGI Fridays has a higher-than-typical share relative to franchise-heavy WBS in the restaurant sector. Unlike franchised locations, company-owned stores expose the issuer to direct operating costs and fluctuations in consumer demand, rendering the structure more vulnerable to economic headwinds.

Cash Trapping and Amortization: Mechanisms for Credit Protection

In response to a declining DSCR, cash-trapping mechanisms within TGI Fridays’ WBS were activated, diverting cash flow to bond repayments rather than reinvestment. This is akin to rapid amortization features seen in many consumer ABS, where early amortization is triggered to safeguard bondholder interests. For TGI Fridays, these measures reduced available operational liquidity, impairing the issuer’s ability to fund improvements or strategic initiatives needed for a turnaround.

Class A-1 notes were paid off in paid off back in May 2022, but approximately $138 million of the A-2 notes remain outstanding as of September 2024 due to limited principal reduction [6].? Dozens of store closures and a slow-down in foot traffic contributed to financial performance concerns.? KBRA and S&P dropped their rating on the A-2 notes to?B?and B-, respectively [7,8].? ABS professionals will recognize the parallel importance of asset performance monitoring and early indicators to proactively manage credit risks.

Manager Intervention

In September 2024, TGI Fridays became the first WBS to activate a backup manager (FTI Consulting) since the financial crisis [9] due to compliance issues and cash flow mismanagement, marking a major event in the history of franchise-backed securitizations. The intervention was initiated by Citibank, the TGIF Funding trustee, after TGI Fridays, the original manager on the deal, diverted a $2 million overpayment meant for bondholders to cover overdue vendor accounts, of which only $228,000 was repaid [10].

This incident underscores the critical role of governance and compliance in maintaining WBS stability and offers parallels to servicer interventions in consumer ABS, where servicers may be replaced to stabilize collections and mitigate risks in distressed debt scenarios. Again, even well-constructed alignment of interests can come under strain when a transaction begins to face performance challenges.

The Role of Backup Management and Compliance

The appointment of FTI Consulting, a well-established business advisory firm with expertise in distressed asset management, offers insights into the role of specialized servicers in managing distressed securitizations. FTI’s responsibilities include collecting royalties, overseeing compliance, and potentially liquidating assets to protect bondholder interests. Similar to consumer ABS servicers stepping in to manage collections or restructuring, FTI’s oversight aims to stabilize cash flows and reinforce credit protections. The activation of a backup manager highlights the necessity of contingency planning and compliance enforcement within structured finance, especially for ABS professionals managing sectors with operational volatility.

Conclusion: The TGI Fridays WBS as a Cautionary Tale

The case of TGI Fridays’ WBS underscores the importance of strong structural safeguards, active cash flow monitoring, and contingency management — lessons highly applicable to almost all ABS. With significant operational and financial headwinds ahead, TGI Fridays’ potential bankruptcy filing signals that bondholders may face limited recovery prospects unless a substantial operational turnaround occurs. For professionals in structured finance, TGI Fridays’ WBS illustrates the challenges of securitizing volatile revenue streams and the critical role of backup management in protecting credit assets under distress.

By understanding these dynamics, structured finance professionals can apply similar principles in managing consumer ABS portfolios, particularly those in sectors vulnerable to market fluctuations and economic cycles.

Footnotes:

[1] Guszkowski, Joe. "TGI Fridays closes 50 restaurants as bankruptcy looms." Restaurant Business Online, 28 Oct. 2024, https://www.restaurantbusinessonline.com/financing/tgi-fridays-closes-50-restaurants-bankruptcy-looms

[2] Debt service coverage ratio.

[3] S&P Global Ratings. "U.S. Whole Business Securitizations Under Stress From COVID-19." March 18, 2020.? https://www.spglobal.com/ratings/en/research/articles/200318-u-s-whole-business-securitizations-under-stress-from-covid-19-11391612.

[4] Kroll Bond Rating Agency. "Kroll Bond Rating Agency Assigns Preliminary Ratings to TGIF Funding LLC Series 2017-1 Senior Secured Notes." Available at:?KBRA?Publication.

[5] Finsight. "TGI Fridays, Inc. - Sponsor Details." Accessed October 29, 2024.? https://finsight.com/sponsor-9311-tgi-fridays-inc?products=ABS%2CHYC%2CIGC&regions=APAC%2CEMEA%2CLATM%2CUSOA.

[6] KBRA. "KBRA Comments on TGIF Funding, LLC Manager Termination Event." Press Release, September 4, 2023.? https://www.kbra.com/publications/qMTWGQmS/kbra-comments-on-tgif-funding-llc-manager-termination-event.

[7] Ibid.

[8] S&P Global Ratings. "Bulletin: TGIF Funding LLC Manager Termination Event Declared."?S&P Global Ratings, September 5, 2024.? https://disclosure.spglobal.com/ratings/pt/regulatory/article/-/view/sourceId/13241587.

[9] KBRA. "KBRA Comments on TGIF Funding, LLC Manager Termination Event." Press Release, September 4, 2023.? https://www.kbra.com/publications/qMTWGQmS/kbra-comments-on-tgif-funding-llc-manager-termination-event.

[10] Maze, Jonathan. "TGI Fridays loses control of most its assets." Restaurant Business Online, 6 September 2024, https://www.restaurantbusinessonline.com/financing/tgi-fridays-loses-control-most-its-assets.