Steak ‘n Shake Avoids Bankruptcy, Pays Off Loan, Sues Lender Fortress

By Jonathan Maze of Restaurant Business,

Steak ‘n Shake has avoided a bankruptcy filing after the company repaid its loan on Friday—just weeks before it was due.

It then turned around and sued its lender—accusing Fortress Investment Group of maneuvering to take over the company by purchasing the chain’s loans on the secondary market and then threatening to force the chain into bankruptcy.

The payoff, and the lawsuit, represented an extraordinary turn of events for a burger chain that has operated for much of the past year with the cloud of bankruptcy hanging over its head.

Steak ‘n Shake, which has been struggling with weak sales and traffic in recent years, was believed to be nearing bankruptcy and was expected to seek out debt protection last week, in advance of a March due date of its loan. As of September, the company had $153 million due on that loan.

Bloomberg reported early on Monday, however, that Steak ‘n Shake paid off the balance due on the loan, though it is uncertain through what means. Parent company Biglari Holdings does not guarantee the debt on Steak ‘n Shake.

According to legal filings, Steak ‘n Shake paid $102 million to repurchase the loans held by Fortress and other lenders. The company has not provided a comment on the lawsuit or the repayment.

The lawsuit provides an interesting look into the “loan-to-own” strategy undertaken by investors such as Fortress, who buy up debt on struggling companies at a discount and then use their status as a secured lender to take control of the companies. Fortress in May acquired the burger chain Krystal out of bankruptcy for a $27 million credit bid—the investment firm bought up that debt on the secondary market. It had previously bought the casual dining operator Craftworks in much the same way.

In its complaint, filed in an Indiana state court on Friday, Steak ‘n Shake said that Fortress had expressed interest in acquiring some of Steak ‘n Shake’s real estate portfolio, which it had put up for sale last year to raise funds to pay for the chain’s shift to a counter-service model—Steak ‘n Shake has historically been a full-service chain with a drive-thru, making it a hybrid chain.

Steak ‘n Shake said that Fortress entered into a confidentiality agreement to get information on the real estate put up for sale. The two sides discussed the sale of the real estate over the course of the summer, according to the complaint. But Steak ‘n Shake argues that Fortress repeatedly changed terms of the offer, which ultimately scuttled the process.

As part of the process, the burger chain argues, “Fortress was given a significant amount of confidential information that would be useful to an investor considering buying the loans and potentially the company.”

That enabled Fortress to extrapolate the value of the whole company, and Steak ‘n Shake argues the investor then went out and started buying the company’s debt on the secondary markets.

Steak ‘n Shake argues that Fortress acquired the loans through subsidiaries that had names different from the investment fund, such as a joint venture called BJC Ventures. The burger chain argues that Fortress bought up a majority of the loans through four separate investment funds. It also argues that Fortress bought the debt at rates higher than market prices, saying that Fortress was able to do so because it had information other investors did not.

After acquiring the loans, Steak ‘n Shake argues that Fortress immediately threatened to force the company into bankruptcy, out of which it had planned to take over ownership of the company.

The result, the burger chain said, “drove up the cost that Steak ‘n Shake had to pay to retire Steak ‘n Shake’s outstanding loans.”