Frugal diners have put Outback Steakhouse at risk of defaulting on its debt.
OSI Restaurant Partners, the homegrown Tampa chain that in two decades grew into one of the nation's most popular and influential restaurant companies, has hired a turnaround specialist help cut costs and boost sales.
The arrival of AlixPartners LLC, a Southfield, Mich., turnaround firm, comes as Moody's Investors Service put the chain's owners on its new "Bottom Rung" list of companies most likely to default on their junk bond debt.
Known euphemistically as the "dead man walking" list in the gallows humour of the distressed bond market, the rating agency estimated 45 percent of the candidates named will default on some part of their debt this year.
Making the list are 283 of the 2,055 companies whose unsecured debt is rated by Moody's, a number that doubled this time thanks to the souring of a private-equity and hedge firm buying binge of the past few years.
Chapter 11 bankruptcy is only one option for the most debt-burdened on the list. A few will work their way out. Many will make stock-for-debt swaps with creditors who risk a worse haircut if they push for a bankruptcy proceeding.
OSI, which has been paying down its $3.2 billion debt, got on the list thanks to a distressed bond rating on $550 million of notes due in 2015 that carry a 10 percent interest rate. Through the firm Miller Buckfin, OSI extended until March 19 a tender offer to buy $73 million of the notes back at 25 cents on the dollar. Many bidders countered with offers of 27 to 30 cents.
AlixPartners is well known as a restructuring firm that specializes in helping nurse companies through bankruptcy. But OSI officials said that's not why they sought the company's expertise last year to chart a cost-reduction plan for 2009.
"Their focus has included distribution cost reduction, labor efficiency, and repair and maintenance service bundling and optimization," said Joe Kadow, OSI's executive vice president.
OSI joins plenty big-name companies on Moody's debtor list. American Airlines, JetBlue, Eastman Kodak, Unisys and the Detroit Big Three automakers all made it. From the Tampa Bay area are struggling Lazy Days RV Center in Seffner, Tampa bulk trucking company Quality Distribution Inc. and the loss-ridden Hooter's Casino in Las Vegas. The casino, controlled by the Clearwater founders of the cheesecake and chicken wing chain, faces a debt payment deadline next month.
The list includes many private-equity and hedge funds that poured more than $100 billion into a buying spree the past five years, much of it based on the once-increasing value of commercial real estate held by the targets. Along with Outback, which was acquired by Bain Capital and Catterton Partners for $3.2 billion in 2006, Moody's list of potential debt implosions includes Bain acquisitions Burlington Coat Factory and crafts retailer Michael's Stores Inc.
The nation's third-largest casual dining chain, Outback is suffering through the recession as much as rivals Chili's, Macaroni Grill, Ruby Tuesday, Capital Grille and Ruth Chris Steakhouse as Americans cut back on dining out. Only Darden Restaurants, the Orlando owner of Olive Garden and Red Lobster, has been able to forge a turnaround by getting customers to spend a bit more through a new menu.
OSI sales for the year dropped 5 percent in 2008 to $3.9 billion. But the trend got worse in the fourth quarter ended Dec. 31 when sales plunged 10 percent.
"Sales have been about as bloody at OSI as the rest of the industry, but it gets worse the higher price of the menu," said Ron Paul, president of Technomic, a Chicago restaurant research firm. "I personally don't think it can get much worse because people can only eat so much Costco chicken before they have to spring for a restaurant meal."
OSI trimmed expenses in the fourth quarter, but that was more than offset by deeper drops in sales. The company lost $739 million in 2008, $442 million of it noncash writedowns for goodwill, a company's way of admitting it overpaid for assets.
OSI, which is in compliance with an array of financial performance restrictions to keep its other debt holders at bay, warned in its quarterly report that it might not be if business continues to deteriorate.
"That could result in a deterioration of its already weak debt protection measures to levels inconsistent with its current ratings," wrote William Fahey, the Moody's analyst who downgraded OSI's debt in the likelihood of the pending note sale at a deeply distressed price.
Mark Albright can be reached at email@example.com or (727) 893-8252.