FAT Brands Sued for Alleged Financial Misrepresentation Amid Debt Crisis

A shareholder has filed a lawsuit against FAT Brands Inc., the owner of popular restaurant chains like Fatburger and Johnny Rockets, claiming the company concealed the extent of its financial troubles. This legal action comes as the company’s stock reached a multiyear low, highlighting mounting concerns over its financial stability.

The lawsuit, filed in the Delaware Chancery Court, alleges that FAT Brands misrepresented its debt situation by classifying debt as cash to secure new financing. According to the complaint, which was submitted in late November, FAT Brands resorted to high-interest loans known as merchant cash advances (MCAs) as its financial condition worsened. The shareholder, Kevin Gordon, claims the company’s financial disclosures did not accurately reflect its liquidity issues, suggesting a deeper crisis than indicated.

In a stark warning issued in late November, FAT Brands indicated it might be forced to file for bankruptcy after creditors demanded full repayment on its approximately $1.2 billion in securitization debt. The company admitted it lacked sufficient funds “on hand to pay.” This situation reflects broader challenges faced by casual-dining chains, many of which have struggled under heavy debt loads and rising operational costs.

Gordon’s allegations paint a troubling picture, asserting that FAT Brands carries over $1.4 billion in debt and may not be able to meet its repayment obligations. His concerns intensified following a failed transaction between FAT Brands and Alagna Advisors, where Gordon is listed as global head of structured credit.

The lawsuit also highlights the potential repercussions for debt holders. These include 352 Capital, a hedge fund associated with Leucadia Asset Management. Jefferies Financial Group Inc., which oversees Leucadia, has faced its own challenges, including winding down 352 Capital following legal troubles related to a former portfolio manager.

In seeking transparency, Gordon is requesting access to FAT Brands’ financial records. He claims the company engaged in a series of bond sales starting last year, involving entities like Axonic Capital and a US unit of Barclays Plc. The complaint alleges that FAT Brands mischaracterized these transactions as standard cash sales, rather than accurately reflecting the liabilities they created.

According to court documents, FAT Brands turned to MCAs around March or April 2023, borrowing as much as $15 million at exorbitant effective interest rates of up to 45%. This borrowing strategy has been described as a “binge of reckless, high-interest, short-term corporate borrowing.”

In a related matter, FAT Brands has initiated its own legal action against Alagna Advisors over a different bond swap, claiming the advisory firm failed to remit payments it owed.

The lawsuit also raises concerns about executive compensation, particularly payments made to FAT Brands Chief Executive Officer Andy Wiederhorn and his family. Gordon alleges that these payments, amounting to about $2.2 million in cash bonuses and additional stock units, should have been allocated towards debt repayment. Wiederhorn, who faced legal challenges last year over allegations of concealing substantial payments as shareholder loans, settled a separate lawsuit for $10 million this week.

As FAT Brands prepares to respond to the allegations, the company’s financial future remains uncertain, with its stock down approximately 85% for the year. The ongoing legal developments will likely have significant implications not only for the company but also for its investors and creditors.