McEwan’s court-monitored restructuring follows a string of creditor protection and insolvency filings by restaurants in Canada and the U.S.
Mark McEwan has spent most of his career as a chef near the top of Canada’s culinary food chain. His first solo restaurant, North 44, opened in north end Toronto in 1990 and served as the beachhead for what would become a food empire that spanned six restaurants, a catering and events business and a chain of fine-food supermarkets, all fuelled by high-profile television gigs.
But despite that prominent spot on Canada’s food landscape, in late September — nearly a year and a half into the global coronavirus pandemic — McEwan revealed that all was not well with his empire.
The business was facing a liquidity crunch and he and partner Fairfax Financial Holdings Ltd. were forced to seek court-monitored protection from creditors to undertake a major restructuring, viewed as the only option after they were “unable to achieve a comprehensive out-of-court resolution that would secure the long term viability of the McEwan Group.”
In an affidavit filed with the court, McEwan says the company went that route only after unsuccessful talks with landlords to improve lease terms, reduce “unsustainable” obligations and exit unprofitable locations.
McEwan’s filing reverberated through the restaurant scene and insolvency circles, where the plight of the restaurant industry has been a hot topic during the pandemic.
“The McEwan CCAA filing is clearly an indicator of larger challenges facing the restaurant and hospitality industry, as a result of the COVID-19 pandemic,” said Linc Rogers, a partner in the insolvency and restructuring practice at law firm Blake, Cassels & Graydon LLP in Toronto.
He noted that the court-monitored restructuring follows a string of creditor protection and insolvency filings by restaurants in Canada and the United States earlier in the pandemic, including Toronto’s King Street Company Inc. — owner of the high-end Italian restaurant Buca and steakhouse Jacobs & Co.— and U.S.-based chains California Pizza Kitchen, Chuck E. Cheese and Ruby Tuesdays.
The problems at McEwan pre-date the pandemic, with losses at some locations more than offsetting profits at the rest. The McEwan Group as a whole has not been profitable since 2017, according to its own filings, and its 2019 fiscal results carried a “going concern” note from auditors. But in court filings, the McEwan Group said “the significant and detrimental impacts of the COVID-19 pandemic” had “exacerbated” the pre-existing issues and made a major restructuring necessary.
On Oct. 15, the company will seek court approval for a plan to sell most of the assets to current shareholders Fairfax and McEwan himself, and to close unprofitable locations while continuing to operating a scaled-down franchise.
Court documents show more than $10 million in liabilities outstanding, with money owed to banks, landlords and Fairfax, including $899,000 in unsecured borrowing from Royal Bank of Canada. McEwan, whose food empire includes Bymark restaurant in Toronto’s Financial District, three Fabbrica restaurants, a 50 per cent stake in ONE restaurant in trendy Yorkville, and high-end grocery stores called McEwan Foods, secured some of the loans to the business against his personal assets, according to the filings in the Ontario Superior Court of Justice.
Following the declaration of the global pandemic in March of 2020, the company adopted a “cash conservation” approach to deal with mandatory closures, restrictions on customer capacity, and suffered from reduced foot traffic as diners stayed home.
The McEwan group also secured additional credit facilities, concessions from landlords, and government subsidies and support programs. But it wasn’t enough, according to the court filings.
The company had to take on even more debt, with no guarantee that it would be enough as capacity restrictions, staffing shortages and higher costs continued to be the order of the day in the industry.
Losses more than doubled in 2020 to $2.8 million from $1.3 million in 2019.
“There remains much uncertainty with respect to the ongoing COVID-19 pandemic and its continued impact on the McEwan Group and the restaurant industry as a whole,” the company said in one court document, adding that it expects to require additional funding to continue operating until COVID-19 related factors “cease negatively impacting the business and revenues improve more significantly.”
Chad Finkelstein, who deals with restaurants frequently in his practice with law firm Dale & Lessmann LLP in Toronto, said that cases as extreme as McEwan’s remain mercifully rare 18 months into the pandemic — but that without government supports things might have been much worse.
“I fear for what happens when the government relief runs out,” he said. “If we’re not in a position where people can go back to seeing the restaurants at full capacity, and customers, you know, don’t have the confidence to do it … there may very well be more bankruptcies.”
Finkelstein said restaurants, which have razor-thin margins in the best of times, have been hit with higher expenses during the pandemic, from additional cleaning and constructing partitions to meet COVID-19 health protocols, to food waste when operating and capacity restrictions were placed on them on short notice.
“The additional expense these restaurants now have, just to survive, is overwhelming, so if not for government relief just to be able to afford to keep the lights on, they wouldn’t be around.”
The Canada Emergency Wage Subsidy, one of the things that has helped keep many restaurant businesses afloat, is set to expire this month — though Prime Minister Justin Trudeau hinted this week that it could be extended yet again.
McEwan laid off some 200 employees during the pandemic, but was able to bring back more than 170 as outdoor and dine-in services began to re-open in the greater Toronto area in the summer of 2021.
Many restaurants, including McEwan’s, have also been surviving by tapping the Canada Emergency Commercial Rent Assistance program and the Canada Emergency Business Account, which extended interest-free, partially forgivable loans of up to $60,000 to small businesses.
The McEwan Group received a CEBA loan and $3.3 million in wage subsidies, as well as well as $300,000 in rent subsidies and some rent deferrals.
Still, that wasn’t enough to ward off its liquidity issues.
Many eateries across the country are also struggling, according to industry group Restaurants Canada, which said this week that sixty per cent of table-service restaurants were operating at a loss in July. Many are having trouble recruiting staff, and the majority don’t expect to reach pre-pandemic staffing levels until 2023.
Rogers, the restructuring lawyer, said an end to government support programs for restaurants will be painful for some.
“Certainly once government support programs end for restaurants some inherent defects in the business model will come to the forefront,” Rogers said.
In its industry update this week, Restaurants Canada said this more than 12,000 food-service establishments have permanently closed their doors since the start of the pandemic. The industry group has been calling on the governments to create and implement targeted industry-specific aid in place for restaurants if and when other programs are allowed to conclude.
Finkelstein said that will be crucial to keep the tremors felt in restructurings like the McEwan Group and King Street from spreading into a major fault line that swallows many more restaurants.
“It was speculated throughout 2020 that it was going to be the norm, that 50 per cent or more restaurants, independent restaurants, would close,” he said. “Fortunately, that has not been our experience, and why do you think that is? I would attribute it almost entirely to government relief.”
Early offers from investors and private equity groups to buy restaurant groups “for pennies on the dollar” were rejected because the operators still thought they could make it through on their own, but that view could change, Finkelstein said, adding that it can be hard to tell from the outside who’s thriving and who might be the next to run aground.
While the average consumer might see busy restaurants that remain open and endure long waits for takeout and delivery and be lulled into thinking that all is well, behind that facade are high fixed costs, added expenses and the proliferation of costly but necessary order aggregators like UberEats and Skip the Dishes are taking a toll on already thin margins.
“You see that restaurants are allowed to reopen in different ways and there’s lineups and it’s hard to get a reservation, you see that you’re sitting at home and you are ordering tons of delivery and your delivery takes like an hour and so you think, ‘Wow, they must all be doing really, really well’,” he said. “They are really busy. Not all are doing very well.”
Rogers, too, said it is difficult to place a value on the businesses right now, something put into sharp relief by the case of the McEwan Group, which is looking to use the insolvency process to sell the viable assets to the existing equity owners.
“In the best of times it is challenging for third-party distressed investors to value insolvent businesses on a go forward basis,” he said. “That challenge is magnified by the pandemic because even after the pandemic wanes — let’s assume that it will — it is unclear if new habits developed by consumers will persist and what the implications of that will be.”
Rogers, for example, wonders if takeout trends last, and whether workers ever return en masse to the downtown core.
“(It’s) hard to predict what the economic effect of that will be and extremely hard to predict in the long term.”
Source: Financial Post