Welcome to the 113th Pari Passu Newsletter,

In recent years, restructuring has only become more complex. Whether it be out-of-court LMEs, or complex and lengthy in-court negotiations and litigation, we often see restructuring have the goal of ‘giving breathing room’ to a company to figure out their problems, rather than completely solving their problems in the restructuring itself.

The case of Red Lobster is fascinating - it incorporates all of these complex elements - including RSA’s, credit bids, and in-court litigation - but has been able to complete a restructuring in the span of a few months while successfully resolving many of the company’s issues and truly providing a pathway for a brighter future. 

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Red Lobster Overview

Red Lobster is an international seafood restaurant chain with over seven decades of history, firmly established as a leader in casual dining. Founded in 1968 in Lakeland, Florida, Red Lobster grew from a single family-owned location into one of the most iconic seafood brands globally, operating approximately 551 locations across 44 U.S. states and 27 in Canada, along with 27 franchised restaurants in markets such as Mexico, Japan, and Thailand (see Figure 1 below). Headquartered in Orlando, the company generates around $2 billion in annual revenue and serves more than 64 million customers each year.

In terms of sales, Red Lobster owns and operates most of their properties. However, for 27 additional restaurants outside of the United States/Canada, Red Lobster has entered into third-party franchise agreements. These franchise agreements remit 5.5% of sales as royalties. In 2023, these franchised units generated a total of $1mm in royalties.

Corporate History

As stated, Red Lobster was formed in 1968 by Bill Darden and was subsequently sold in 1970 to General Mills. For the next 25 years, the company expanded across the nation, until General Mills spun off their restaurant division into Darden Restaurants in 1995. Darden Restaurants put Red Lobster up for sale in 2014.

Red Lobster Leveraged Buyout

In 2014, private equity firm Golden Gate Capital acquired a 51% stake in Red Lobster through a $2.1bn LBO transaction. This buyout was interesting for two reasons. First, Golden Gate Capital primarily financed the buyout with a $1.5bn sale-leaseback transaction. [2] 

As a review, a sale-leaseback transaction enables a company to sell an asset and then lease it back from the purchaser. The seller of the asset becomes the “lessee,” and the buyer becomes the “lessor.” To put this into context, let’s look at a quick example.

Let’s say Company A wants to engage in a sale-leaseback transaction with $500 of assets. Company A can sell that $500 to Company B and then lease it back, paying x% per year. If we assume that Company A agrees to lease it back for 10% of the total asset price annually (or $50 in lease expense per year), a common but incorrect assumption would be that the lease would only last for ten years ($50 × 10 years = $500). However, in reality, the lease is likely to be significantly longer.

The reason is twofold. First, as discussed in our previous analysis of sale-leasebacks, these transactions typically involve long-term lease commitments, often spanning 15–20 years with additional renewal options. This protects the lessee from the landlord changing terms or leasing to someone else, ensuring business continuity. Second, the financing structure reflects the fundamental time value of money principle. The $500 received upfront by Company A is worth more today than its future lease payments due to the discounting effect, meaning Company B—acting as the buyer-lessor—expects a return exceeding a simple payback period.

The second point that makes this buyout fascinating is its contentious nature. At the time of the purchase, the activist investing firm, Starboard Value LP, who owned a 5.5% stake in Darden, displayed substantial opposition to the buyout. Starboard investors argued that a separation of Red Lobster from Darden was not enough - they rather wanted a split that lumped the seafood restaurant with Olive Garden and LongHorn Steakhouse, and create a new subsidiary with those three companies that Darden owned [3]. 

Ultimately, this opposition did not amount to any material changes to the sale of Red Lobster, but it provides us with an opportunity to look in hindsight and understand the perspective of an activist perspective. To do so, we must consider why a conglomerate like Darden would consider a spin-off vs. a sale in the first place. From Darden’s perspective, Red Lobster was likely underperforming compared to their other restaurant companies, namely, Olive Garden. It likely made sense from a valuation standpoint to sell the company, as financial projections had the Red Lobster business declining in the future.

If this was the case, why did Starboard want a spin-off? The reason most companies engage in a spin-off is because they believe the spun-off entity can be more representative of true valuation. Spin-offs usually occur within conglomerate companies, where investors are unable to reach a fair valuation because the conglomerate entity is made of so many different divisions that it is too difficult/complex to figure out the true value. A great example of this occurred in 2023, when Endeavor Group Holdings spun off its WWE division and allowed it to merge with the UFC, with hopes that the new entity (NYSE: TKO) would be more reflective of its true value. Starboard likely advocated for this as a spin-off would allow the new entity to be re-evaluated by the market to adjust to its fair market value, leading to immediate appreciation in Darden’s stock price [4]. Additionally, from the perspective of an activist investor, they likely had a motive to be involved in the spin-off, where they substantially increase their investment stake and have an opportunity to take over the ‘restaurant division’ if needed. Effectively, a spin-off would have maximized Starboard’s optionality [3].

2016 & 2020 Ownership Transition

As we mentioned above, in 2014, Golden Gate purchased a 51% stake in Red Lobster via a $2.1bn LBO transaction. Looking at this transaction, we can use some rough napkin math to find the implied equity and enterprise value of Red Lobster at the time of the deal. We know that the transaction enterprise/purchase price was $2.1bn. The specific financials of Red Lobster at the time of the transaction are unavailable, but sources show that $1bn of the $2.1bn purchase price was used to pay down outstanding debt, meaning that Red Lobster had, at minimum, $1bn of debt. This would imply an equity value of approximately $1.1bn. It is likely that Red Lobster had more debt outstanding than $1bn, however, which would incrementally reduce the implied equity value at the time of the deal.

In 2016, Golden Gate Capital began selling part of its ownership stake in Red Lobster. Specifically, they sold approximately 25% of their 51% stake to the Thai Union Group for $575mm [1],[9]. 

In 2020, members from Red Lobster’s management team, Thai Union, and other investors purchased the remaining stake from Golden Gate Capital under the name Seafood Alliance, effectively giving Thai Union and the Seafood Alliance group a majority stake in the company The specific ownership breakdown from 2014 to 2020 can be seen below in Figure 2.

Causes of Distress 

Financial Issues

As we will discuss below, Red Lobster’s financial weakness stemmed from 3 different sources: Thai Union, the ‘endless shrimp campaign’, and the effects of the 2014 sale-leaseback transaction. However, before diving into these 3 components, we want to highlight that the main driver of cash burn was the incremental lease expenses from the sale-leaseback transaction, which led to $177mm of additional annual lease expenses for Red Lobster as of 2023. While the other 2 drivers of distress undoubtedly contributed and worsened Red Lobster’s situation, these effects were in the tens of millions of dollars in total. The sale-leaseback created over a billion in cumulative expenses. 

Below is an image of the company's capital structure at the date of filing. The prepetition term loan administrative agent was by Fortress Investment Group (we will discuss the implications of this holder below), and the ABL facility was financed by Wells Fargo Bank [1]. For clarification, an administrative agent acts as a representative for a syndicate of lenders. In this case, Fortress was the administrative agent but also held parts of the prepetition term loan themselves.

In terms of their liquidity position, Red Lobster had little runway. In May 2023, the company had approximately $100mm in cash. By the end of 2023, that cash position declined to $30mm. Ignoring the rest of their free cash flow burn, Red Lobster has $32mm in annual interest payments, meaning they had less than a year before an imminent restructuring [1]. The specific financial performance of Red Lobster is unavailable as the company was private prior to their bankruptcy filing.

Relationship with Thai Union Group

From the first day declaration, the debtor cited issues with their shrimp supply chain (we will talk about the “shrimp” part next). Specifically, the debtor received all of their shrimp from the Thai Union, one of the majority shareholders in Red Lobster. From the first day declaration:

“I understand that Thai Union exercised an outsized influence on the Company’s shrimp purchasing, as indicated by, for example, Mr. Kenny’s April 2023 purported direction to Thai Union to continue producing shrimp for Red Lobster that did not flow through the traditional supply process or bid cycle or adhere to the Company’s demand projections.” [1]

To add to this, Thai Union had such an outsized influence that they effectively forced Red Lobster to have an exclusive shrimp deal with them, as the debtor ended up eliminating two different shrimp suppliers. The impact of this is significant - it provides monopoly power to Thai Union to upcharge shrimp prices and force Red Lobster to overstock their inventory, leading to substantially higher costs. The way that Thai Union forced Red Lobster to overstock their inventory was by exerting their rights as a majority shareholder. Employee reports showed that Thai Union representatives began to sit in on meetings between Red Lobster and their other seafood suppliers. Red Lobster’s ability to negotiate with other seafood suppliers is what allowed them to find the cheapest price and maximize their profits. Because Thai Union was a direct competitor of these other seafood suppliers (and thus gained access to some of their competitors' strategies and pricing options), the other seafood suppliers effectively allowed Thai Union to run a monopoly supplier. Although we cannot fully know, some believe the reason Thai Union would do this (even if it drove Red Lobster into bankruptcy) is because the large prices it was able to change Red Lobster helped increase Thai Union’s profits, and because the company was private, the impact of this would not immediately be felt by the majority shareholders (in this case, Thai Union) [13]. Thus, it is possible that Thai Union did ignore the health of Red Lobster as a separate entity, and rather saw the restaurant and the chance to be a majority shareholder as an opportunity to promote its own seafood products.

“Endless” Shrimp Campaign

A logical question you might have about the point above is, why does a shrimp-specific contract have such a large impact on Red Lobster’s Deterioration? According to the debtor’s first-day declaration, the reason is somewhat humorous: the “Ultimate Endless Shrimp” (UES) campaign which is listed as the first driver of distress. In May 2023, the UES campaign was a limited-time promotion, but shortly afterwards became a permanent menu item, for the price of $20. This decision was the primary driver in Red Lobster’s loss of $11mm in the third quarter of 2023 [1]. However, as we will discuss in the next section, the Endless Shrimp Campaign specifically covered up the true underlying cause of financial distress for Red Lobster. Nonetheless, we want to highlight the impact that this campaign made on the company's operations.

After reading about the Endless Shrimp Campaign and Thai Union, you may view each as separate drivers of Red Lobster’s bankruptcy. However, there is a much deeper story that ties these two groups together and shows just how mismanaged Red Lobster was in the years leading to its Chapter 11 filing. According to CNN, “Shrimp dishes became a larger focus of Red Lobster’s menu under Thai Union, which was a large shrimp supplier to Red Lobster. Every promotion was shrimp-centric” [13].  Essentially, what this means is that Thai Union was selling all the shrimp to Red Lobster (remember above, they became the sole supplier of shrimp by effectively forcing out other suppliers) to make Red Lobster a clear loss leader at the benefit of Thai Union.

Thai Union comes into play here as Red Lobster has claimed that Thai Union forced the company to order substantially more inventory than the projected demand of the UES deal. Additionally, Thai Union encouraged excessive advertising of the UES deal, despite demands not increasing proportionately. Ultimately, this led to a substantial increase in advertising costs [1]. 

Now, the Endless Shrimp promotion only caused a total loss of $11mm for Red Lobster as the company filed for Bankruptcy less than a year after introducing this menu option. To clarify, although the Endless Shrimp Campaign ran for longer than a quarter, the $11mm represented the total loss from ‘UES’ and the Q3’23 loss as, shortly after introducing the $20 deal, they increased prices to $25 to break even [19]. Although Red Lobster’s annual guest count has declined to around 70% of its pre-COVID levels, it is still a company that generates billions in revenue per year. As such, it becomes likely that the Endless Shrimp campaign was structured to be a loss leader, with the intention of undercharging it’s product cost in order to increase volumes and purchases for other products at Red Lobster with higher markups. While the debtors may be correct in citing that their loss leader program did not perform as expected, as it did not increase purchase volume for higher markup items, $11mm amounts to a fraction of the total value of Red Lobster. 

Thus, it is clear that in their first day declaration, Red Lobster has used the costs suffered by Thai Union and the endless shrimp campaign to mask a much larger issue. Time to dive into the true driver of financial distress!

Failed Sale-Leaseback Transaction

The above two points on Thai Union and the failed endless shrimp campaign were the cited reasons for Red Lobster’s distress in the company's first-day declaration filing. However, one thing that Red Lobster did not directly address, but was undoubtedly the key driver of their deteriorating financials during and after the Covid pandemic was the impact of the sale-leaseback transaction [18].

Earlier in this paper, we briefly discussed the sale-leaseback transaction of $1.5bn when Golden Gate took Red Lobster private in 2014. Besides allowing Golden Gate to put in minimal equity, the leaseback was actually the cause of distress. Let’s take a look at the financials behind this transaction. As we have mentioned above, Red Lobster has never been its own public entity, so financials are not fully available. However, the leaseback transaction was completed with American Realty Capital Properties back in 2014, and the $1.5bn transaction featured a 9.9% GAAP (generally accepted accounting principles) cap rate that grows at 2% every year [14]. To clarify, cap rates are determined by dividing the net operating income of the asset by the property value (or purchase price) of said asset. For a sale-leaseback transaction, this cap rate is multiplied by the sale-leaseback amount to determine the annual lease expense. So, in 2014, the new lease expense for Red Lobster would be $1.5bn * 9.9%, or approximately $149mm in annual rent to American Realty [18].

For a company that generates billions in revenue annually (reported $2.6bn in 2018), this amount may seem sustainable[15]. However, let’s take a closer look at what Red Lobster’s lease expense was prior to this transaction. Prior to this transaction in 2014, the average property tax was around 1.3% [16]. Additionally, we can assume that the $1.5bn sale-leaseback represented the majority of Red Lobster’s real estate assets. If we assume these figures for Red Lobster to service its real estate expenses, this would have amounted to just under $19mm ($1.5bn * 1.3%) [18]. This means that the result of the sale-leaseback transaction resulted in $130mm ($149 - $19mm) of additional lease expenses in 2014[18].

By 2018 given the lease expenses grew 2% a year as mentioned above, Red Lobster’s lease expenses would have amounted to approximately $161mm (see Figure 5 below). Given that the company reported $2.6bn in revenue in 2018, this means that these lease expenses represented an additional 5% of Red Lobster's net profit margin. On average, restaurants only generate around 3-6% in net profit margins, with the most profitable generating just above 10% margin [17]. These figures highlight the additional stress these lease expenses put on Red Lobster.

Since 2019, the restaurant's annual guest count declined by approximately 30%, and has only marginally improved since 2020/2021 [1]. Investors may notice that revenues increased 25% from 2021-2023, but the company reported a material decline during 2024 in both sales and EBITDA. In 2023, Red Lobster reported a $76mm net loss. As seen above, Red Lobster paid an additional $167mm ($189 - $21mm) in lease expenses than they would have if the company just had to service their real estate via property taxes. That, paired with the COVID-19 pandemic which caused a significant decline in annual customers, led to a severe liquidity strain that ultimately forced the company to file for Chapter 11 bankruptcy.

Although we mentioned this above, a key point of this section that we want to highlight is the extent to which a company will go to cover up fundamental mistakes that it makes. To put this into perspective, let’s compare the $11mm loss to the rent expense in 2023. The lease expense in 2023 was around $177mm so approximately $3mm (177/52) per week. This means, that the first cause that the company cites in the First Day Declaration was the same size of ~3 weeks in rent, the true cause of distress. Ultimately, this shows that when you combine over a hundred million dollars of annual incremental expenses for a decade, a majority shareholder who used Red Lobster as an entity to boost their own products, and the introduction of a cash-burning campaign, the only option is an inevitable restructuring.

One question you might have is, why would Golden Gate engage in a transaction that effectively drove Red Lobster to bankruptcy in less than a decade? We can assume that Golden Gate did their analysis on Red Lobster’s cash flow ability, and concluded that the company would be able to service their incremental lease expense. If we take a step back, their analysis was not necessarily incorrect; after all, Red Lobster was able to survive and meet their expenses for 9 years after the sale-leaseback transaction. However, the key word is, ‘survive’. By engaging in this transaction, Golden Gate put a significant risk to the core of Red Lobster’s business. Remember, Golden Gate purchased Red Lobster for $2.1bn. Assuming $1.5bn represents the majority of their real estate assets, the equity left in the business was ~$600mm. If secular trends deteriorated or Red Lobster suddenly faced an unpredicted obstacle, the company would only have a $600mm cushion (which makes the $150mm+ of annual rent suddenly look very relevant) before the company, and any equity left in the business would be at risk of impairment.

As we know, this secular deterioration did occur, with Red Lobster having multiple years of cash burn and negative net profits. Given all this, one might conclude that Golden Gate should have suffered greatly from their investment. In reality, Golden Gate ended up making substantial gains from this transaction. As we outlined in Figure 2 above, Golden Gate sold 25% of its stake in 2016 for $575mm, and its remaining stake in 2020. Given that Golden Gate only put in $600mm of its own capital (as $1.5bn of the $2.1bn was financed via the sale-leaseback), the 2016 sale would almost have returned their entire investment. Assuming its remaining 24% stake was also sold for around $500mm in 2020, Golden Gate would have doubled their money invested in this transaction [18]. Please note that these figures are estimates as clear ownership and valuation are not publicly available.

This is where the story all ties together, and why Thai Union and their endless shrimp campaign only worsened a sinking ship. The thesis behind Thai Union's purchases in 2016 and 2020 purchases through Golden Gate was the belief that becoming a majority shareholder would allow Thai Union to maximize synergies and push their own product line to new customers via a new entity [18]. While Thai Union could try to implement / maximize these synergies, it was already a tough starting point given the very high rent expenses, making it very hard to turn around the business at this point. 

To summarize, Golden Gate showed a masterclass in predatory sale-leaseback private equity. As a first step, they bought a business with significant real estate assets and used that real estate for a sale-leaseback which allowed a minimal entry equity check. The company was saddled with a huge rent expense, but the resulting lower free cash flow did not matter, the goal was to flip this business to the next buyer. With great timing, Golden Gate sold their entire stake by the time Covid hit and pocketed a great return while putting a company at strong risk of bankruptcy. 

Out-of-court Attempts

By December 2023, it became clear that Red Lobster had to engage in a restructuring. The company fired the entire management team and replaced them with an independent director named Lawrence Hirsh, who has 30+ years of restructuring experience. In December 2023, there were reports of a potential out-of-court restructuring, where the term loan lenders would engage in a debt-for-equity exchange and take over 80% of the reorganized entity. This attempt was ultimately unsuccessful, and the debtors began to pursue an in-court bankruptcy plan.

Chapter 11 Process

Although Red Lobster filed for bankruptcy on May 19, 2024, their negotiation process began earlier in the year as they created a Restructuring Support Agreement.

As an important aside, you can think of an RSA as an ‘early’ or ‘pre-discussed’ plan of reorganization. The RSA typically includes negotiations between the debtor and the main creditor groups and often results in getting some, but not all the creditors needed to approve the plan of reorganization (to approve a plan, the debtor needs 50.1% in number of votes and 66.67% in amount of debt for each voting class) [5]. A company may choose to participate in a RSA for many reasons, but the primary driver is typically a goal to minimize expenses. Coming in with a pre-negotiated agreement saves the amount of negotiating time in bankruptcy, which leads to reduced fees and incremental operating expenses [5].

Back to the case of Red Lobster, there were 3 main components discussed in the RSA. The first was lease rejection. Under section 365 of the bankruptcy code, a company can assume, assign, or reject any leases in bankruptcy. For a company like Red Lobster, which has many properties leased across the nation, the ability to reject leases is essential in a cost-savings program and allows the debtor to emerge post-bankruptcy with a much slimmer capital structure. Specifically in this RSA, Red Lobster filed to reject a total of 228 leases (of these 228 leases that were rejected, 122 stores were closed down)  [1]. Although the specific savings from the lease rejection were undisclosed, prior to filing, Red Lobster had 687 total locations, which cost them $177mm in total lease expenses annually. While each lease costs a different amount in reality, if we assume each lease roughly costs the same, closing down 122 leases would save approximately $31mm annually (177mm/687 leases * 122 closed leases) [11].

The second component of the RSA we want to highlight is the DIP financing. The DIP proposed in the RSA was provided by the pre-petition term loan lenders, Fortress Investment Group. This DIP included a $100mm new money injection, with an additional $175mm of the pre-petition term loan claims being rolled up (this is the amount of the $264mm of prepetition debt that Fortress held). This DIP was secured by previously unencumbered assets of Red Lobster, giving the creditors super priority in the capital structure. The DIP held an interest rate of SOFR + 10.5% for the entire DIP class (both new money and rolled-up amount), with the form of consideration for the new money DIP being cash and the form of consideration for the rolled-up DIP being PIK [1],[6]. 

Finally, the third key point of the RSA was a negotiated purchase by Fortress Investment Group. In specific, Fortress Investment Group was utilizing a credit bid to purchase the company. A credit bid effectively allows a creditor to purchase a company in bankruptcy by using its current debt against the company as a source of financing in the acquisition. For example, let’s say we have a company in bankruptcy, with a secured tranche of debt of $500mm and an unsecured tranche of debt of $300mm. Let’s say the purchase price of the company is $700mm. A secured creditor can use its debt ($500mm) to finance the transaction. In this case, $500mm out of the $700mm can be financed via the secured creditor's claim, meaning they only have to spend $200mm of their own capital in this acquisition. This is what Fortress did - they used the full DIP amount of $275mm to purchase Red Lobster for $365mm (the remaining 90mm of capital was new money from Fortress) [1],[6]. The plan of reorganization projected an adjusted EBITDA value of approximately $75 mm in 2025, implying a purchase multiple of 4.9x EV/EBITDA. A question you might have is, why would Fortress provide $100mm of new money DIP just to have it used in a credit bid? The reason for this is twofold. First, the economics of the DIP are quite enticing. As we mentioned above, Fortress is getting interest of SOFR + 10.5,%, which would be an all-in yield of almost 15%. Additionally, it is likely that DIP financing was needed to keep Red Lobster running through bankruptcy. Without a source of liquidity, the company would be unable to continue operating through the Chapter 11 process, which would lead to liquidation and likely a lower return for Fortress themselves. A final reason for Fortress providing DIP financing was likely because, if Fortress did not provide it, another, external creditor group would have come in and offered the capital. Not only would this mean Fortress would lose out on the high coupons associated with DIP financing, but they would be in a worse position to take over the company post-reorganization.

To recap, let’s walk through an analysis of Fortress’s position to understand the flow of capital throughout Red Lobster’s restructuring process. Before Red Lobster filed for Chapter 11 bankruptcy, their capital structure consisted of $264mm in prepetition debt as well as $29mm of outstanding Letters of Credit. In the prepetition debt, Fortress was a key player, as they ended up providing DIP financing. Specifically, Fortress provided $100mm of new money and rolled up their portion of the pre-petition debt, which amounted to $175mm. This totaled to $275mm in DIP loans. The capital structure during bankruptcy is as follows: $275mm DIP claims, $89mm of remaining prepetition term loans, and the remaining $29mm of Letters of Credit. Following the DIP financing, Fortress executed a purchase of Red Lobster to bring the company out of Chapter 11 bankruptcy. The purchase price was $375mm, with the entire $275mm of DIP financing being used in a credit bid. The DIP claims were then partially canceled, with some of the claims being reinstated as debt for the reorganized entity.

Litigation

On May 19, 2024, Red Lobster filed for bankruptcy with its Restructuring Support Agreement. However, they did not file with the required votes to get the RSA passed, meaning some of the negotiations still had to play out in bankruptcy courts.

The biggest point of contention came from the Unsecured Creditors Committee (consisting of various suppliers and vendors). Their complaint targeted the proposed DIP (specifically the roll-up amount). For clarity, the assets that secured the rolled-up DIP capital were previously unencumbered assets of the estate (this means that no creditor had a claim to it). Thus the UCC opposed the notion that unencumbered assets could be used to secure the rolled-up claims, claiming that the prepetition lenders had no reasonable claim to those assets. The UCC's primary argument was that those assets could rather be used to bring in new capital, which would provide Red Lobster with more runway (and thus time for the UCC to negotiate valuation to boost their returns). However, Fortress wanted to settle this dispute quickly so Red Lobster could exit bankruptcy and continue operations without the burdensome expenses of the Chapter 11 process. To do this, they provided the general unsecured creditors with a minimum of $2.5mm of cash to support recoveries. The second point of litigation helps to explain that the unsecured creditors can recover more than the $2.5mm from Fortress. The UCC has decided to sue the Thai Union and the former directors/managers. If we recall our discussion earlier, Thai Union Group, the majority shareholders in Red Lobster, engaged in the ‘Endless Shrimp Deal’ and created a monopoly by forcing out some seafood suppliers for Red Lobster. As we established above, although the Thai Union and the ‘UES’ campaign were not significant in terms of being the main drivers of Red Lobster’s distress, this is still a claim worth pursuing. It is undeniable that the actions by Thai Union hurt Red Lobster’s supply chain sourcing and allowed Thai Union to engage in anti-competitive practices. Additionally, because the GUCs are effectively out of the money without a settlement, this claim makes sense to pursue in terms of maximizing recovery value as these recoveries will go towards the general unsecured creditor class and the prepetition term loan lenders. The recoveries for each class can be seen below. The miscellaneous secured claims are secured claims outside of the DIP and prepetition term loan lenders. The other priority claims consist of critical vendor groups [6]. 

Future of Red Lobster

On September 16, 2024, Red Lobster emerged from Chapter 11 protection. The post-reorganized entity has exited with a much slimmer capital structure and substantially fewer properties as Red Lobster ended up shutting down 122 leases during the Chapter 11 process. Under the plan of reorganization, the DIP loans were partially canceled out via the credit bid discussed earlier. Part of the DIP Loan’s recovery will be in the form of takeback debt (debt that is issued to post-reorganization lenders), which will exist in the new company.

Additionally, RL Investor Holdings (an entity created by Fortress to purchase Red Lobster) will primarily own the equity of the post-reorganized entity. With respect to the prepetition term loan lenders, their source of recovery will come from two sources. First, whatever remaining capital leftover from the purchase will be used to repay part of the prepetition lenders’ claims. Additionally, the prepetition term loan lenders will receive their pro rata share of 60% of the proceeds from the litigation against former officers (we discussed this above in our litigation section, where creditors are suing former officers from Thai Union for not fulfilling their fiduciary obligations and forcing Red Lobster into detrimental supply chain contracts). The other 40% of the proceeds will be the GUC's only form of recovery [12].

In addition to the new debt issued to DIP lenders, Fortress invested an additional $60mm of equity to help revitalize the business [7]. Per the plan of reorganization, the financial projections for the post-reorg entity can be seen below in Figure 7. As seen, the company is estimated to generate positive net profit in 2026, and have profitable free cash flows starting in 2024 [6].

Outside of the financial restructuring, Red Lobster has taken an operational step that has revolutionized the financial and entrepreneurial world / landscape. During bankruptcy, Red Lobster established Damola Adamolekun (who is 35 years old) as the CEO of the company. While there are many CEO’s of ages similar to Damola, none have had the opportunity to lead a company as large and complex as Red Lobster. Fortress’s ideology was simple: Red Lobster needed a rejuvenation of life and an update into the modern era of business; Damola offered that opportunity, and has thus far done a great job in restoring the brand reputation of Red Lobster [8].

With the restructuring completed, it will be fascinating to see if Red Lobster meets its financial expectations. The success of credit bids in bankruptcy has had variance in the past, with many criticizing the strategy stating that lenders do not have the required expertise to engage in acquisitions of companies and the operations of the company post-acquisition. However, with Fortress establishing a young CEO to lead the firm, all indications point towards a healthy post-reorganized company.

Sources: [1],[2],[3],[4],[5],[6],[7],[8],[9],[10],[11],[12],[13],[14],[15],[16],[17],[18],[19]

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