Largest Pizza Hut, Wendy’s Franchisee Considering Bankruptcy: Is The Restaurant Franchise Model Broken?

Another restaurant franchisee is considering filing for bankruptcy. NPC International, the largest U.S. franchisee for both Pizza Hut and Wendy’s restaurants, is reportedly considering a restructuring option that could include bankruptcy protection.

NPC operates about 1,200 Pizza Hut restaurants and nearly 400 Wendy’s locations. The company reportedly has about $1 billion in debt and has begun the negotiation process with its lenders, sources told Bloomberg.

While NPC is hoping to avoid a Chapter 11 filing, it seems the franchisee may have run out of options. NPC has seen its credit rating downgraded by S&P as well as Moody’s this week, after missing interest payments in January to its lenders, CNBC reported.

S&P said at the time of the downgrade that it does “not expect NPC will satisfy its payment obligations within 30 days of the due date” while Moody’s said it expects NPC’s free cash flow “will remain negative and liquidity to be weak.”

Weak sales and growing debt have contributed to NPC’s demise, causing it also to default on a lending agreement last year and come to a forbearance agreement with its lenders, Restaurant Business reported.

NPC has seen its earnings before taxes, interest, depreciation, and amortization decrease by 16% in the last quarter, Bloomberg said.

There is reportedly a concern that a ripple effect could take place throughout the franchise industry. If NPC files for Chapter 11, it could cause lenders to pull back on financing large-scale loans to franchisees looking to scale quickly.