Red Lobster Out of Bankruptcy Proceedings, Set Up to Be Plundered Again by Private Equity

Scott Buchanan1 Comment

Red Lobster is a large, historic seafood restaurant chain operating in the U.S. and Canada. Last summer I wrote on how it got driven into bankruptcy: How an All-U-Can-Eat Special Driven by a Controlling Investor Pushed Red Lobster Over the Edge

Red Lobster used to be a pretty profitable business. Then in 2014 its owners sold it to a private equity firm called Golden Gate Capital. This private equity firm promptly plundered Red Lobster by selling its real estate out from under it, with those funds going to the PE firm. Instead of owning their own land and buildings, now the restaurants had to pay rent to landlords.  This put a permanent hurt on the restaurant chain’s profits. I don’t know this as fact, but because it is part of the usual PE playbook, I assume that the PE firm also made Red Lobster issue debt (bonds) so the PE firm could further plunder Red Lobster by having it pay “dividends” to its PE firm owners, using the money raised by issuing the bonds. After this glorious financial engineering, the private equity firm in 2019 sold a 49% stake to a company called Thai Union. Thai Union bought out the rest of Red Lobster ownership from Golden Gate in 2020.

Thai Union did a poor job managing the U.S. based restaurant chain, forcing cost-cutting measures that were counterproductive, and finally forcing a continual all-you-can-eat shrimp special, against the better judgment of on-the-ground Red Lobster management. That shrimp special made Red Lobster buy a lot of Thai Union’s shrimp, but led to large losses last year. The business had been suffering for a couple of years, with Covid shutdowns and competition from nimbler eateries, but the losses from the shrimp special sent it scurrying for bankruptcy protection back in May.

There are two main flavors of business bankruptcy. The direst form is Chapter 7, where the assets of the firm are sold off to meet obligations to creditors, and the firm goes out of business.

The more common form is Chapter 11, where the intent is to keep the business going (see Appendix). Somebody gets stiffed in the process, of course. Usually, common shareholders get almost nothing except maybe a reduced number of shares in the reorganized company. Preferred shareholders often get a few more shares. Unsecured bondholders may get 30-40 cents on the dollar as a settlement, or a reduced amount of bonds in the new company, or maybe stock shares. Sometimes the company will issue a new set of bonds which are “senior” to the old bonds, which reduces the value of old bonds. Other unsecured creditors like vendors may get something like 50 cents on the dollar.  

Secured creditors are higher up in the pecking order, and so often get higher recoveries. (The “covenant” for a bond or loan would specify if the loan is secured by, say, the value of the equipment in the restaurant).

Red Lobster restaurants have kept operating this year (2024), while creditors were kept at bay via the protection offered by the bankruptcy filing. As of September, Red Lobster emerged from the chapter 11 bankruptcy. A private equity group has taken over operations. They have injected some $60 million cash, which is actually not very much for this situation.

I was curious about what happened to Red Lobster’s creditors, such as vendors and bond holders. A first-level internet search, even with AI help, did not tell me how they fared as part of the settlement. I had read earlier this year that Red Lobster had something like $ 1 billion in debt, so I assume that a lot of bondholders got stiffed in this process.

In May the company announced that it had “ voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida. The Company intends to use the proceedings to drive operational improvements, simplify the business through a reduction in locations, and pursue a sale of substantially all of its assets as a going concern…Red Lobster’s restaurants will remain open and operating as usual during the Chapter 11 process, continuing to be the world’s largest and most-loved seafood restaurant company. The Company has been working with vendors to ensure that operations are unaffected and has received a $100 million debtor-in-possession (“DIP”) financing commitment from its existing lenders.”

The “working with vendors” is an important piece here. When I peered at the official Red Lobster court bankruptcy website to try to glean more intel on the fate of the creditors, there was a list of leading “Unsecured Creditors”. These included Pepsico (supplying beverages) and Gordon Food Services, a major Canadian food supplier, as well as the owner of the store properties (Realty Income Corporation), which was presumably owed a lot of unpaid back rent.

Ironically, after one private equity firm plundered Red Lobster, then sold it to the hapless Thai Union (which ended up taking a $540 million write-down on their investment), the restaurant chain is now in the hands of yet another PE firm. I could not find definite information on the deal, but again we may assume that the PE firm got the creditors (bondholders, vendors, etc.) to accept “haircuts” on what they were owed, as opposed to getting almost nothing if Red Lobster went Chapter 7 and shut down. Thus, the new PE firm will start off with a relatively virgin company to plunder again.

My Brave AI search agrees with that assessment:

The company’s restructuring efforts may prioritize the interests of new investors and creditors over those of existing bondholders, potentially resulting in a less favorable outcome for bondholders… It is likely that the bondholders will be subject to a restructuring plan that may involve debt forgiveness, debt-for-equity swaps, or other arrangements that could result in a loss of principal or interest for the bondholders.

Side comment: If you, too, want to feed at the trough of private equity, there are a number of PE firms you can buy stock shares in so you can join in their profits. See 50% Endowment Returns Driven by Private Equity Investments: How Rich Universities Get Richer (But You Can, Too) .

APPENDIX: EXPLANATION OF CHAPTER 11 BANKRUPTCY

The text below is from the North Carolina bankruptcy law firm Stubbs Perdue:

Chapter 11 bankruptcy is a legal process that allows businesses to reorganize their debts and operations while continuing to operate. Unlike Chapter 7, which involves liquidating assets to pay off creditors, Chapter 11 aims to restructure a company’s obligations to improve financial stability and pave the way for future growth. Chapter 13, on the other hand, is typically reserved for individuals with a regular income, focusing on debt repayment plans.

Typical Chapter 11 Process

Chapter 11 process typically involves several key steps:

  • Filing the Petition: The process begins with the company filing a petition in bankruptcy court.
  • Developing a Reorganization Plan: The company works with its creditors to create a plan that outlines how it will restructure its debts and operations.
  • Negotiating with Creditors: The plan is subject to approval by the court and the creditors, who may negotiate the terms to protect their interests.

Throughout this process, the court plays a supervisory role to ensure fair treatment of all parties involved.

Blake Lively and disinformation tipping points

mdmakowsky1 Comment

For those who missed the big story last week, it turns out that Blake Lively’s director and co-star, Justin Baldoni, feared that he was going to be publicly outed as an abuser and subsequently instructed his publicity team to start a preemptive disinformation campaign against her. The story is hot because the cache of subpoenaed text messages are the seeming definitition of “overwhelming evidence” and “receipts”, the victim is a prominent woman, and the activities in question are heinous. Which is all true, but I’m interested because 1) it seems to have really, honestly worked and 2) is was relatively cheap and easy, all to an extent that even surpised the alleged perpetrators.

We all know about Russian disinformation efforts at this point, but those are are the products of a government agency. They have enormous resources at their disposal. This internet campaign to pre-emptively attack and discredit a woman who is the (alleged) victim of gratuitous harassment was carried out by a small band of publicists, agents, and their team of assistants. This isn’t a billion dollar operation. This isn’t even a million dollar operation. This is a project carried out over cronuts and text messages by middle brow entertainment business aspirants looking to climb the ladder in between improving their scores at Orange Fitness.

What I’m saying is that disinformation scales faster and easier than I would have ever guessed and I don’t think I’m alone. A couple reddit threads, instagram and tik-tok posts, and tweets, all posted by accounts run and backpocketed by the publicity agency for precisely these purposes, and within hours the world has turned on a single human in a wave of disapprobation. A woman, you’ll recall, who had done absolutely nothing that would seemingly be able to give traction to public shaming.

This is a massive technology shift. If there is a final lesson to 2024, it’s we don’t know what’s real and what’s manufactured news. Worse still, those who would proclaim to be the least trusting are generally those that are the easiest to mislead, falling down endless rabbit holes of conspiracy theory and fabrication. Those conspiracy theories are fun to laugh at (and I suspect even more fun to believe with your whole heart), but I don’t think conspiracy theory falsehoods are the only plague going forward. It’s going to be joined by a growing trend of informational nihilism, an inabiilty to trust any news or information source.

It’s not that hard for me to imagine a swirling, vicious online discourse between left and right wingers, each fully enveloped in their cozy echo chambers of conspiracy and confirmation bias, while their more moderate (and numerous) peers simply drop out of the conversation entirely, unable to see the bits and bytes flying back and forth as anything more than unverifiable noise.

What happens to a democracy when the median voter believes in nothing?

David Hume’s Wisdom in the Age of AI

Joy Buchanan1 Comment

Nothing says “Christmas cheer” like David Hume and empiricism. I am at EconLog this week with

Rediscovering David Hume’s Wisdom in the Age of AI

In our era of increasingly sophisticated artificial intelligence, what can an 18th-century Scottish philosopher teach us about its fundamental limitations? David Hume‘s analysis of how we acquire knowledge through experience, rather than through pure reason, offers an interesting parallel to how modern AI systems learn from data rather than explicit rules.

In his groundbreaking work A Treatise of Human Nature, Hume asserted that “All knowledge degenerates into probability.” …

Furthermore, I explain why this could have implications for the limits of AGI, if LLMs learn from experience and are limited in the number of datapoints they can observe. It is also a follow-up to my summer post: Is the Universe Legible to Intelligence?

Tariffs: Bad for Revenue

Zachary Bartsch3 Comments

Economists are pretty united against tariffs. There are lots of complicated arguments. Keeping things simple, one reason is that they are bad for welfare. President-elect Trump seems to imply that tariffs can raise a lot of government revenue. But in lieu of what? The Tax Foundation estimates that there is absolutely no way that tariffs can replace all revenue from income taxes. The primary reason that they cite is that imports compose a tiny portion of the potential tax base. There are plenty of goods and services produced domestically that wouldn’t be subject to the tariffs. Any time we add a tax exemption, we’re adding complication, higher compliance costs, and distorting consumption patterns, etc.

For this post I singularly focus on the tax revenue.  In fact, let’s demonstrate what *maximizing* tax revenue looks like under three cases: 1) Closed economy with a tax, 2) Open economy with a tax, & 3) Open economy with a tariff. I’ll use some simple math to demonstrate my point. None of the particulars affect the logic. You’ll reach the same general results with different intercepts, slopes, etc. Let’s start with a domestic demand and domestic supply.

Closed Economy with a Tax

Whenever tax revenue is raised, there is a difference between the price paid by demanders and the price received by suppliers. In a closed economy a tax might be imposed on all goods. In these examples, I treat the tax as some dollar per-unit of output tax. But it’s a short jump to percent of spending taxes, and then another short jump to percent of income taxes. With this in mind, demanders pay more than the suppliers receive by the amount of the tax. Tax revenue is the tax rate times the number of units of output that are subject to the tax. That’s the thing we want to maximize.

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What I Learned from Erwin Blackstone

James Bailey4 Comments

I’m told that Professor Erwin Blackstone died earlier this year, but I haven’t been able to find anything like an obituary online; consider this a personal memorial.

I knew Dr. Blackstone first as the professor of my Industrial Organization class at Temple University, where he taught since 1976. He was a model of how to take students seriously and treat them respectfully; he always called on us as “Mr./Ms. Last Name” and thought carefully about our questions.

Of course I learned all sorts of particular things about IO, especially US antitrust law and history- from Judge Learned Hand and baseball’s antitrust exemption to current merger guidelines and cases. I would later ask Dr. Blackstone to join my thesis committee, where he would heavily mark up my papers with comments and critiques.

He was a key part of how I was able to become a health economist despite the fact that Temple lacked a true health economist on the tenure-track economics faculty while I was there (as opposed to IO or labor economists who did some health). Blackstone’s coauthor Joseph Fuhr– a true health economist who also had Blackstone on the committee of his 1980 dissertation- came part-time to teach graduate health economics. Blackstone and Fuhr worked together to write the health economics field exam I took.

Finally, I learned from Blackstone by reading his papers. While he wrote many on health economics, my personal favorite was his work with Andrew Buck and Simon Hakim on foster care and adoption. It convincingly demonstrated the problems of having one fixed price in an area that most people don’t think about as a “price” at all- adoption fees. Having one fairly high fee for all children means the few seen as most desirable by adopting parents (typically younger, whiter, healthier) get adopted quickly, while those seen as less desirable by would-be adoptive parents linger in foster care for years. Like much of his work, it pairs a simple economic insight with a rich explanation of the relevant institutional details.

Academics hope to live on through our work- through our writing and the people we taught. Having taught many thousands of students at Cornell, Dartmouth, and Temple over 55 years, served on dozens of dissertation committees, and published over 50 papers and several books, I expect that it will be a long, long time before Erwin Blackstone is forgotten.

Source: Academic Tree. Charles Franklin Dunbar founded the Quarterly Journal of Economics in 1886.

Nintendo vs Nintendo: Time Prices of Video Games in 1986 and 2024

Jeremy HorpedahlLeave a comment

For decades one of the most popular Christmas gifts for kids (and often adults) has been video game systems. And Nintendo has long been a dominant player in this market: the original NES arguably launched the modern gaming market in 1986 (even though it wasn’t the first, it was the first blockbuster) and Nintendo’s latest offering, the Switch, is now the best-selling console ever in the US.

As we often ask on this blog: has it become more or less affordable for an average worker to buy this iconic Christmas gift (or even buy one for yourself)?

When it comes to the consoles themselves, the Switch and NES are, perhaps surprisingly, equally affordable. The original NES cost $90 in 1986, while the Switch costs $300 today. Average wages in late 1986 were $9/hour and they are about $30/hour today. So in both years, it took about 10 hours of work to buy the console (alternatively, it’s about 25% of median weekly earnings in both years).

But as any serious gamer will tell you, the individual game cartridges can cost as much or more than the console if you want to play a lot of games. For example, the games available in the 1986 Sears catalog ranged from $25-$30. To buy just the 10 games in that catalog would cost $275 — over 30 hours of labor at the average wage, or about 3 hours of labor per game.

Today there is a wider range of prices for games, but the most expensive Switch games are around $60, or just 2 hours of labor at the average wage. There are also plenty of games around $30, or just 1 hour of labor.

The challenge with the comparison is that video games today are much higher quality, challenging, and advanced in so many ways. Is there any way to make a more direct comparison?

Yes. Nintendo offers an annual subscription for $20 to Nintendo Switch Online. Included in the subscription is access to nearly every NES game, plus Super Nintendo and Gameboy games. Not only do you get the 10 games from the 1986 Sears catalog, but many dozens more. All for less than $1 hour of labor at the average wage.

In other words, for 30 hours of labor today (the time to purchase those 10 original NES games), you could buy about 46 years worth of subscriptions to Nintendo online. That’s almost a lifetime of video game play, with many more advanced games.

Ho Ho Ho – – It’s Time for the Annual Santa Claus Stock Rally

Scott BuchananLeave a comment

There tends to be a significant rise in broad stock indices the last two weeks of the old year and into the first two trading days of the new year. This is termed the “Santa Claus” rally. Sometimes it is focused on the last five trading days of the old and the first two days of the new.

Here is a chart showing average changes in S&P 500 prices for the month of December for 1970-2023 (blue line), and more recent data (last ten years, orange line).

Seeking Alpha

Some possible reasons for this year-end rally are:

Tax-loss harvesting: Investors may sell stocks at the end of a year to claim capital losses, to offset capital gains. They may then repurchase these stocks at the start of the new year.

Low trading volume: Larger institutional investors often go on holiday in this timeframe, leaving the market more to individual retail investors, who may be more optimistic.

Herd mentality: If most investors believe stocks will go up, then probably stocks will go up.

Santa Predicts the Future

Perhaps even more significant is the power of the Santa Claus rally to predict stock returns in the coming year. The following table lists returns for the last five trading days of the old year plus the first two days of the new year, and also the returns for the whole new year:

The Street

The table above was published in 2023, so the full year 2023 stock returns at that point were “TBD”. We now know the 2023 returns were hugely positive (approx. 23%). So, for 1999-2023, Santa came to town 19 out of 24 times for a year-end rally. Also, since 1999, the market rose 19 times during the Santa Claus rally; the following year, the S&P posted gains 15 times. Out of the 5 times the market lost ground during same period, the market fell in 3 of the following years. So the market performance in this transitional timeframe correlates well with the stock gains for the whole new year.

Will stocks soar again this holiday season? I have no idea. We are off to a shaky start, with the S&P 500 down about 1.5% in the past five days , through 12/22. This after the market hated the Fed’s more hawkish stance last week, being now likely slower to reduce interest rates than previously assumed.

As usual, nothing here should be considered advice to buy or sell any security.

Happy holidays

mdmakowskyLeave a comment

Did you really think I was going to write a post this week? Sorry, this week is for far flung family and nutritionally disastrous cookies.

If you simply must have an economic observation, here you go: if you don’t gain weight during the holidays you’re probably too debt averse. Consume now, pay later. It’s worth the vig.

Updated List of Top Posts for 2024

Joy Buchanan1 Comment

In August, I listed the Top EWED Posts of 2024. Here are a few more highlights. This list is roughly based on web traffic, starting with the highest number of views for 2024, since the August list.  

  1. Mike Makowsky has the top post since August with Bad service is a sign of a better world. “What if service in restaurants, hospitality, etc is, in fact, lower in quality than it was one or two decades ago? I would like to suggest that this is a good sign of improving times.”  Thoughtful. Recommended. Bosses will not be requiring “15 pieces of flair” anymore. I have noticed that restaurant servers these days seem to wear whatever they want. It was previously noted by Mike that Kitchen staff were canaries in the coal mine.

2. Grocery Inflation Since 2019: BLS Data is Probably About Right by Jeremy-“What if we actually looked at receipts?”-Horpedahl. You can find him on Twitter/X.

3. You know it’s good when a post with such a cryptic title goes viral. Mike wrote about the topic people were thinking about, in the moment: At the moment (updated 10/22/24) Sometimes we write about the economics community and what began as a critical mass of people that used to call itself #EconTwitter. Some of those people have moved to Bluesky. You can find Mike there at @mikemakowsky.bsky.social, and most of us have accounts there. Getting social media just right is tricky. If you follow the right people and don’t waste too much time on it, then social media can be part of How to Keep Up With Economics (James).

4. Predicting College Closures: Now with Machine Learning James Bailey brings the important (unwanted) news that not all college are going to make it through the next decade, and there are signs. This follows up on what was previously listed as a top post in August: Predicting College Closures

5. Publish or Perish: A Hilarious Card Game Based on Academia My review of a new board game. If it’s not for you, it’s not for you. I played a test copy with some fellow nerds and had a great time.

6. Jeremy explains, “… fast food prices (“limited service meals”), which have definitely outpaced wages over the past 4 years, and continue to grow…” Grocery Inflation is Under Control, Fast Food Prices Aren’t

7. Jeremy asks, Did 818,000 jobs vanish?

8. Scott’s saga is perhaps attracting traffic from search engines from people with the same problem. Recovering My Frozen Assets at BlockFi 2. Scams and More Scams

9. Post-Pandemic Lumber Market Zachary Bartsch writes, “People used to talk about higher gasoline prices all the time, but never discussed with the same enthusiasm when prices fell. The same is true for lumber.” Good for teaching about supply and demand.

10. I Give Up, Standard & Poor’s Wins James lets us learn from his journey- “my stock picks underperformed the incredible 26% return the S&P has posted so far this year.”  This is something most people would rather not admit, and yet for most of us it’s true.

11. James explains, “Cheapflation”: Inflation Really Does Hit the Bottom Harder. People were mad about inflation. Voters were mad about inflation. It’s worth understanding better. Some of us are in an echo chamber and need to peer out, especially if we think a lot about how (in fact) the world is getting better. Or maybe we even think about data indicating that On Average, American Wage Earners are Better Off Than They Were Four Years Ago (Jeremy).

12. Why Podcasts Succeeded in Gaining Influence Where MOOCs Failed attracted some attention. If you are being honest, would you have predicted a priori that Joe Rogan talking in a closed room FOR HOURS would outdo Ivy League professor lectures? In retrospect, it might seem obvious, but I probably would have gotten the prediction wrong. MOOCs and podcasts both launched around the same time because the internet lowered the cost of broadcasting. They both had some success. In terms of shaping culture or voting behavior, I think it’s clear that podcasts win. Until a product is launched on the market, we just don’t know what will become popular, which is a topic that came up in the podcast I recorded recently: Joy on The Inductive Economy podcast

Speaking of what I don’t predict, EWED is starting to get web traffic from LLMs like chatgpt.com. Right now, it’s very small compared to Google search. For a while, I wondered if LLMs would simply plagiarize us without giving us any credit. Maybe that’s our raison d’être. Here’s me being dramatic about it in 2022  –  “Because of when I was born, I believe that something I have published will make it into the training data for these models. Will that turn out to be more significant than any human readers we can attract?” 

However, writers of the world, LLMs might start giving you credit. There is some demand from users for sources and citations. (My paper on made up sources). 

A little more credit to the true 2024 EWED all-stars, even though they were already listed in August: Young People Have a Lot More Wealth Than We Thought, by Jeremy Horpedahl,  continues to be a top performer. And, Mike wrote about an important current event in culture: Civil War as radical literalism   

While we are settling scores and doing web traffic round-ups, there is one thing I’d like to put on the record. I made one resolution last year, publicly on January 3, 2024. I have made good on this promise. The people who run the AdamSmithWorks website have informed me that I wrote their top post of the year, Would Adam Smith Tell Taylor Swift to Attend the Super Bowl?

Excel’s Weird (In)Convenience: COUNTIF, AVERAGEIF, & STDEVIF

Zachary Bartsch1 Comment

Excel is an attractive tool for those who consider themselves ‘not a math person’.  In particular, it visually organizes information and has many built-in functions that can make your life easier. You can use math if you want, but there are functions that can help even the non-math folks

If you are a moderate Excel user, then you likely already know about the AVERAGE and COUNT functions. If you’re a little but statistically inclined, then you might also know about the STDEV.S function (STDEV is deprecated). All of these functions are super easy and only have one argument. You just enter the cells (array) that you want to describe, and you’re done. Below is an example with the ‘code’ for convenience.

=COUNT(A2:A21)
=AVERAGE(A2:A21)
=STDEV.S(A2:A21)

If you do some slightly more sophisticated data analysis, then you may know about the “IF” function. It’s relatively simple; if a proposition is true (such as a cell value condition), then it returns a value. If the proposition is false, then it returns another value. You can even create nested “IF”s in which a condition being satisfied results in another tested proposition. Back when excel had more limited functions, we had to think creatively because there was a limit to the number of nested “IF” functions that were permitted in a single cell. Prior to 2007, a maximum of seven “IF” functions were permitted. Now the maximum is 64 nested “IF”s. If you’re using that many “IF”s, then you might have bigger problems than the “IF” limitations.

Another improvement that Excel introduced in 2019 was easier array arguments. In prior versions of Excel, there was some mild complication in how array functions must be entered (curly brackets: {}). But now, Excel is usually smart enough to handle the arrays without special instructions.  Subsequently, Excel has introduced functions that combine the array features with the “IF” functions to save people keystrokes and brainpower.

Looking at the example data we see that there is an identifier that marks the values as “A” or “B”. Say that you want to describe these subgroups. Historically, if you weren’t already a sophisticated user, then you’d need to sort the data and then calculate the functions for each subgroup’s array. That’s no big deal for small sets of data and two possible ID values, but it’s a more time-consuming task for many possible ID values and multiple ID categories.

The early “IF” statements allowed users to analyze certain values of the data, such as those that were greater than, less than, or equal to a particular value. But, what if you want to describe the data according to criteria in another column (such as ID)? That’s where Excel has some more sophisticated functions for convenience. However, as a general matter of user interface, it will be clear why these are somewhat… awkward.

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