Financial experts break down TGI Fridays voluntary bankruptcy filing as restaurant chain slumps

TGI Fridays is the latest casual American restaurant chain to announce it has filed for bankruptcy protection in Northern Texas in hopes of "restructuring" the business.

The Dallas-based company filed a voluntary Chapter 11 petition in a Texas federal court on Saturday, a copy of which was obtained by ABC News, saying it would use this time to address legacy liabilities and look for ways to "ensure the long-term viability of the brand" after recently shuttering dozens of locations.

The restaurant, which first opened in New York City in 1965, has faced a slew of operational hardships from increased costs to changing consumer habits brought on by the COVID-19 pandemic that drastically altered the dining landscape .

Rohit Manocha, executive chairman of TGI Fridays, confirmed in a statement that the pandemic was a "primary driver of our financial challenges."

He called these next steps "difficult but necessary actions" to protect its stakeholders, including domestic and international franchisees, adding that "restructuring will allow our goforward restaurants to proceed with an optimized corporate infrastructure that enables them to reach their full potential."

TGI Fridays did not respond to ABC News' request for additional comment, but according to the press release, "all restaurants will remain open and continue to serve customers as usual" during this time.

The landscape has changed for many casual sit-down eateries in the U.S., including competitors like Red Lobster that recently got cleared to exit Chapter 11 after years of losses with a sale to a new owner.

How mismanagement may have contributed to TGI Friday's financial spiral Financial and retail expert Hitha Herzog explained to "Good Morning America" that Chapter 11 was looming for the casual dining chain after its trustee, Citibank, which had overseen TGI Fridays financing since 2017, terminated its management role earlier this fall.

"The company lost control of several management functions because they lost the trustee - Citibank - who oversaw several management functions terminated its role," Herzog said. "Citibank, in simple terms, fired its client and absolved itself from overseeing licensing and franchise business, personnel decisions, collecting royalties, marketing and administrative tasks as well as financing through securitization. While the company has a stand-in consulting company taking on these responsibilities, the permanent replacement still has yet to be named."

The chief research officer of H Squared Research also pointed out that TGI Friday's financial structure was on shaky ground.

"The structure of a 'whole business securitization' relies on the company - in this case TGI Friday's issuing corporate bonds backed by the future 'promise' of cash driven by royalties from the licenses used by franchisees," she said. "In a series of serious financial mismanagement, including a lack of paying back fees to cover other payments to vendors, and a massive hit to their restaurants, the company started to financially spiral."

Importantly, Herzog also explained that the losses for TGI Fridays are related to its decline in popularity among customers.

"Most significantly, people are not interested in eating at TGI Fridays. The menu hasn't changed much for almost two decades. Post-pandemic, people are drinking less, working from home and ordering in," she said. "They would rather pour their money into fast casual dining. Shake Shack and Chipotle became and still remains wildly popular."

She continued, "this change in restaurant culture had a massive impact on TGI Friday's bottom line."

What does Chapter 11 filing for TGI Friday's parent company mean for its restaurants Financial expert John Bringardner, who has previously tracked bankruptcies as Head of Debtwire for companies in distress like Red Lobster and BurgerFi, echoed Herzog's sentiments, adding that TGI Fridays news highlights the challenges for legacy, household restaurant names.

The throes of the pandemic and leftover debt burdens, he said, "have created a difficult environment for fast-casual chains to thrive."

"For many of these brands, restructuring through bankruptcy is a strategic move to close unprofitable locations and streamline operations, aiming to re-emerge leaner and more competitive. This trend reflects a wider reality in the industry where legacy brands may need to adapt or face a tough path forward in an evolving dining landscape," he said.

The Chapter 11 filing on Saturday "stopped the clock on payments" for rent and other vendors, which Bringardner said gives TGI Friday's "breathing room to restructure."

"But it's important to note that this is only the TGI Friday's parent company that is in bankruptcy. It owns and operates just 39 restaurants while dozens of franchisees operate individual locations across 41 countries," he explained. "Because the securitized debt backing the franchisees is a special type of bankruptcy-remote financing, they will remain outside of the Chapter 11 and will continue to operate - customers shouldn't notice any difference."

"The parent will likely have to close or sell unprofitable locations as part of the restructuring. That's the usual playbook for restaurant bankruptcies, and it's what we saw its UK arm do in September when it went under and sold half its locations to new private equity owners," he said.