Rising Interest Rates Not the Worst Restaurant Worry, RFDC Panelists Say
Cristin O'Hara, center, with Bank of America Merrill Lynch, shared her outlook on interest rates and more at the Restaurant Finance & Development Conference last month.
Rising interest rates are on the minds of restaurant operators, but even though they’re about a full point higher than they were a year ago they’re still not the biggest cost concern, according to expert panelists at the Restaurant Finance & Development Conference last month.
“I don’t know that our customers are viewing interest rates as number one on the list of concerns, but it’s certainly in the top five,” said Nick Cole with Wells Fargo Restaurant Finance. “Some of the more difficult cost issues that they’ve been facing are more in the middle of the P&L,” meaning the profit and loss statement.
Cristin O’Hara, managing director at Bank of America Merrill Lynch, agreed. “There’s already a stressed P&L,” she said, citing items like rising wages, healthcare costs and commodity price increases that trump higher interest rates. “But I do think in general we’re seeing…the demand for capital is decreasing.”
The term loan B-rated or high-yield market was $3.3 billion as of November 2018, she said, down from $3.7 billion the year before, “which is kind of a big difference year over year, and I think that’s going to decline as people start to absorb those interest rates. And they may not tap those capital markets as readily as they might have.”
Cole, who joked at the start of the panel that “I’ve predicted five out of the last two recessions,” detailed his outlook for the next one. “If you’re making a five-year loan, which is a typical term, you have to assume there’s going to be a recession at some point during that five-year loan time horizon,” he said. “You also have to look at the operating environment that we’re in today, which is much tougher. We’re not seeing a lot of folks who are seeing much margin expansion in their P&Ls. In fact in general we’re seeing across our customer base margin contraction of 100 to 200 basis points on average.”
Asked to give his outlook on the casual dining segment, Armando Pedroza of Citizens Bank said he’s seeing “some green shoots” even though many “have predicted its demise. We read about it, it’s dead, it’s going away,” those reports say. “I don’t believe that, and we’re definitely seeing some improvement in casual dining across the sector, specifically within some of the larger brands.”
Robert Daniel with Regions Bank selected quick-service restaurants as “the most resilient” industry segment. “I think they have upped their game from a food-quality standpoint, and the convenience piece is still on point with most consumers. So it’s definitely the healthiest part overall of our portfolio.
“I will say, though, even brands that are up are not as up as they were last year, and they’re not up last year as much as they were the year before,” he said.
All panelists spoke on the “credit summit”portion of the Restaurant Finance & Development Conference in November. Next year’s conference is Nov. 11-13 at the Bellagio in Vegas.