A Burger King franchise operator in Puerto Rico owned by LBO shop
By adding the cushion, Caribbean Restaurants received an upgrade from ratings agency Standard & Poor’s. The company’s debt is now rated ‘B-,’ and an S&P analyst noted that the modified credit agreements make it less likely that the company would default. Caribbean Restaurant’s lenders earned a 50-basis-point fee to change the terms of the company’s debt, according to S&P. The ratings agency kept its “negative” outlook on the fast-food operator.
Castle Harlan, based in New York, bought Caribbean Restaurants in 2004, after the company had passed through the hands of three other buyout firms. Sponsor-to-sponsor deals have become more common—accounting for 70 percent of LBO shop exits in 2007, according Dealogic—and Castle Harlan has taken part in this trend. The firm bought eight of the 12 companies in its fourth fund from other sponsors.
The strategy has provided mixed results for the firm. Aside from the struggle with Caribbean Restaurants, Castle Harlan has also had its hands full with Ames True Temper, which has operated at a consistent loss but has been showing recents signs of improvement. Still, the firm likes secondary deals and claims that in the last 15 years it has generated higher IRRs and multiples from its secondary deals than from non-secondary deals.
For instance, Castle Harlan scored a big return with container shipper Horizon Lines, which the firm bought from LBO shop The
Moreover, through debt recaps on four companies in its vintage-2003 fourth fund, the firm has already returned 100 percent of invested capital to investors, according to our source.
Still, Castle Harlan has its work cut out for it with Caribbean Restaurants. Puerto Rico’s economy has been in the doldrums for years, and consumers are generally eating out less. Several LBO-backed restaurant companies have declared bankruptcy in 2008, while ratings agencies have put others on notice for probable downgrades.—J.H.