Fat Brands Hit With $1.3B Debt Acceleration

On November 17, 2025, UMB Bank, acting as trustee for Fat Brands' securitized debt, issued acceleration notices declaring $1.26 billion in principal and $43.2 million in accrued interest immediately due and payable.¹ This "hard default" was triggered not merely by a covenant breach, but by a failure to make required payments on the October 27, 2025, quarterly distribution date due to insufficient funds in the collection accounts.¹

Key Developments:

• Acceleration Event: The trustee exercised Section 9.2 of the Indentures, moving past "rapid amortization" directly to full acceleration of all outstanding notes.¹

• Entities Impacted: The default covers four key special purpose vehicles (SPVs): FAT Brands GFG Royalty I, FAT Brands Royalty I, FAT Brands Fazoli's Native I, and Twin Hospitality I.²

• Liquidity Crisis: Fat Brands held only ~$2 million in unrestricted cash against the >$1.3 billion demand, making immediate repayment impossible without a massive capital injection or Chapter 11 filing.¹

• Advisor Standoff: Bondholders have retained White & Case (legal) and Houlihan Lokey (financial) to drive restructuring negotiations, while Fat Brands has engaged Latham & Watkins.³

• Systemic Signal: This marks the third major Whole Business Securitization (WBS) failure in the restaurant sector recently, following similar stress events at Hooters and TGI Fridays.⁴⁵

Immediate Implications: The acceleration effectively freezes the "waterfall" of royalty payments, cutting off the parent company from any residual cash flow. With bondholders organized and advised by Houlihan Lokey, we expect a push for a debt-for-equity swap or a pre-packaged Chapter 11 filing within the next 30-60 days unless a white knight investor emerges.

What Fat Brands' Collapse Reveals About Asset-Based Lending to Multi-Unit Operators

The collapse of Fat Brands' capital structure is more than just a bad quarter for a burger chain; it is a structural indictment of how aggressive Whole Business Securitization (WBS) models behave when the "Manager" (the parent company) loses operational viability. For alternative lenders holding paper in franchise systems or multi-unit operators, the specific mechanics of this failure expose critical vulnerabilities in "bankruptcy remote" collateral.

The Failure of the "Bankruptcy Remote" Shield

Lenders often price WBS notes tighter than corporate debt because the royalty streams are theoretically isolated in Special Purpose Vehicles (SPVs). The theory is that even if the parent company (Fat Brands) fails, the franchisees will keep selling pizzas and burgers, and the royalties will keep flowing to the SPV.

Here is the reality: The acceleration notices were issued against four separate SPVs simultaneously.¹ The "separateness" failed because the parent company acts as the Manager. When the Manager cannot fund marketing, supply chain coordination, or brand standards due to a liquidity crunch (Fat Brands had only $2M cash on hand),¹ franchisee unit economics deteriorate rapidly.

• Lender Takeaway: In lower-middle market ABL deals, do not value royalty/fee streams as independent annuities. If the parent company’s OPEX coverage ratio drops below 1.0x, the value of the "remote" collateral correlates 1:1 with the parent's insolvency risk. This aligns with recent rating agency actions on similar structures, where manager termination events have become primary drivers of downgrades.¹⁰¹¹

Waterfall Mechanics: From Cash Trap to Drought

Most WBS indentures include a "Cash Trap" trigger (usually at a DSCR of 1.5x - 1.75x) where 50% of excess cash flows are retained, and a "Rapid Amortization" trigger (usually at DSCR < 1.2x) where 100% of cash is swept to pay down principal.¹⁰

Fat Brands skipped these early warning signs and went straight to a payment default. The 8-K explicitly states the default occurred due to "insufficient funds in the collection accounts" to meet the October 27 quarterly payment.¹

• The Math: This implies a DSCR well below 1.0x. The waterfall usually prioritizes (1) Trustee/Servicer fees, (2) Interest, and (3) Principal. Failing to pay interest/principal means the royalty stream itself has evaporated or been diverted.

• Red Flag for ABLs: Watch your borrower's "Systemwide Sales" vs. "Corporate EBITDA" spread. Fat Brands was acquiring loss-making chains (Smokey Bones) to boost systemwide sales (the top line that drives securitization capacity) while destroying corporate-level cash flow.¹⁸

Creditor Positioning and Recovery Scenarios

The engagement of Houlihan Lokey by the bondholders signals an aggressive stance.³ Unlike a typical bank workout where amendments are common, securitized trusts are rigid. The Trustee (UMB Bank) acts on direction from the "Control Party" (usually the senior-most noteholders).

• The Tranches: The debt stack typically includes Class A-2 (Senior) and Class B-2 (Subordinated) notes.¹⁰ In a liquidation scenario, Class B holders are likely out of the money.

• Precedent: In the recent TGI Fridays WBS stress, trading values for subordinated tranches plummeted, and the manager was terminated prior to bankruptcy.⁵ We expect Fat Brands' B-tranche notes to trade at similar distressed levels.

• The "Credit Bid" Risk: Lenders should anticipate a "credit bid" strategy where senior noteholders foreclose on the equity of the SPVs, effectively taking ownership of the brand IP and cutting out the current public equity holders entirely. This mirrors the strategy seen in the Hooters restructuring, where franchisees and founders acquired assets out of Chapter 11.⁴

Strategic Implications for Direct Lenders

If you are financing independent sponsors or PE firms rolling up franchises:

1. Tighten "Manager" Covenants: Do not rely solely on the SPV's DSCR. Include a "Manager Solvency" covenant that triggers a default if the parent company’s liquidity falls below a fixed threshold (e.g., $10M or 3 months of corporate burn).

2. Cross-Default Provisions: Ensure your facility cross-defaults with the borrower’s securitized debt. You do not want to be the last secured lender at the table when the WBS trustee sweeps the cash.

Review "Bad Boy" Guarantees: The trustee likely has recourse to the parent for "bad boy" acts (fraud, misapplication of funds). Verify if your borrower’s diversion of royalty payments to fund OPEX constitutes a trigger that pierces the corporate veil.¹²

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