Chilango ‘Burrito Bonds’ may not be worth a hill of beans; founders try to save troubled chain

Almost 800 people who collectively invested £3.7m into Mexican food chain Chilango’s mini-bonds, marketed as ‘Burrito Bonds’, could be left with virtually worthless investments under plans being proposed to the company’s shareholders.

The company’s shareholders recently received emails asking them to vote in favour of transferring the company’s mini-bond liabilities into a new form of equity, in a bid to ease its £7.2 m debt burden.

The proposal means instead of the 8% interest they’re currently owed according to the terms of the raise, bondholders would be promised returns sometime in the future provided the company improves its financial situation.

Issued with the new ‘debt like’ share class – known as preferred equity –the nearly 800 former bondholders would be first in line for any dividends paid out by Chilango; however, with the company on course to make a £1.7 m pre-tax loss in the 12 months to the end of this March, that is far from guaranteed.

Those who invested in its ‘Burrito Bonds 2’ fundraise between October 2018 and April this year are due 8% p.a. in twice yearly payments and the return of their initial investment at the end of a four-year term.

The transfer to preferred equity does not change how much investors are owed, but will supposedly give Chilango greater flexibility when it comes to making repayments; failure to make dividend payments to preferred shareholders does not mean a company is in default, unlike if it misses bond payments.

Warnings of the dangers of investing in mini-bonds are manifold, but investors are apparently still prepared to take on the risk in exchange for a headline grabbing coupon; that is of course of little comfort if the company goes under, and investments are wiped out in a restructuring.

The move to preferred equity holdings, which do not come with voting rights, will be subject to shareholder approval and is one of a number of steps the 12-restaurant chain is taking to try and get

Last month Chilango brought in restructuring firm RSM, and it is also due to launch a proposal for a company voluntary arrangement (CVA), a debt solution which allows firms to cut rents and close restaurants.

An approved CVA will allow the company to exit leases it holds on unopened sites which its bond prospectus estimated would cost £597,000 in the 12 months to the end of March 2019; such an arrangement will require majority approval from the firm’s creditors, including the Burrito 2 bondholders.

If the new equity is agreed by shareholders, it would ease Chilango’s debt burden, as the £3.7 m burrito bond debt and that of other unsecured creditors would disappear from its balance sheet; the raise is currently due to cost the chain £236,000 a year in interest.

The company also owes £7.2 m to ‘other creditors’ and in long-term loans relating to its two burrito bond fundraises and on loans to shareholders, on which the company was paying between 8 and 15% interest; the company had negative equity of £1.3 m at the end of March.

Chilango’s will take place on 19th December, having been postponed from 29th November due to the restaurant chain’s talks with RSM.

Chilango’s co-founders Eric Partaker and Dan Houghton said in a statement: ‘Chilango remains profitable at the restaurant-level, however in recent years the market in which we operate has changed significantly.

‘This proposal allows us to make important changes so we can support our stakeholders and continue serving our loyal guests.

‘We are proud of the strong brand and passionate following our teams have created and look forward to the future.’