Bain Capital Case

We recommend the second choice, pre-emptively negotiating with banks before violating covenants in the hope of avoiding a forced bankruptcy. Meanwhile, we use the fifth choice, repurchasing bank debt in the open market, as a backup plan. Furthermore, we use the combination of the first choice (cut marketing and advertising spending to boost near-term EBITDA) and the third one (build cash in the short-term) as a last make-up choice.

If the bank agreed to release the restrictions of covenants, for example increase the maximum ratio of debt to last 12 months EBITDA to 7 times (see Exhibit 1), then the company would operate just as it predicts. Nothing needs to be changed.

If the bank refused to increase the ration, the company could repurchase bank debt to maintain the ratio below 6 (see Exhibit 2). According to history records before 2008, average revenue per restaurant in quarter 4 is 6% higher than that in quarter 3. However, in 2008, revenue in quarter 4 is 7% lower than that in quarter 3. In such a stagnant economy, we assume a 10% drop of revenue from quarter 4 in 2008 to quarter 1 in 2009. Following the trend of revenue change, we assume a 10% drop in EBITDA from quarter 4 in 2008 to quarter 1 in 2009 by adding an extra 3% average historical drop to the original 7% decrease. Then we predict the increase of EBITDA in quarter 3 and quarter 4 according to historical records. In 2009, we need to respectively repurchase $3.5M, $8M and $9M to fulfill bank covenant of the first three quarters. In 2010, the condition of operation would become better off. As a result, we wouldn’t need to worry about bank debt any more.

If it still didn’t work well, the company could, to some extent, try the last luck by sacrificing longer-term growth to maximize short-term profits. Specifically, the company could build cash in the short-term and cut marketing and advertising spending to boost near-term EBITDA at the same time.