The restaurant industry is bracing for a reckoning as a record tide of debt threatens to choke franchisees of major chains like Pizza Hut and Burger King.
Like other industries, restaurants have taken advantage of more than a decade of ultra-low interest rates and levered up to build new locations — or sometimes simply to reward shareholders. That’s a change from past decades, when restaurant debt levels were low compared with other industries.
Now, debt loads relative to earnings among companies in the Russell 2000 Restaurants Index are around the highest on record — a trend that’s been exacerbated this year by new accounting rules that require more leases to be recorded on a company’s balance sheet. For a while, the debt looked manageable. But that’s changing as the U.S. becomes oversaturated with restaurants, causing growth to slow even as labor costs climb. S&P Global Ratings is bracing for location closures and defaults to pick up.