Former Guggenheim Partners President Todd Boehly’s bet that he could turn around the largest Pizza Hut franchisee in the world is looking increasingly fraught as money managers offload debt tied to the company at steeper and steeper discounts.

Loan investors, who helped Boehly’s Eldridge Industries LLC acquire NPC International Inc. less than two years ago, are already losing confidence he’ll be able to revive the chain operator’s fortunes. NPC’s debt reached fresh lows in recent weeks after it reported another round of underwhelming earnings. The company’s first- and second-lien loans are now hovering at around 80 and 60 cents on the dollar, according to data compiled by Bloomberg.

Boehly has amassed a slew of high profile investments over the past two decades, from prized real estate properties to an Oscar-winning film studio and even a stake in the Los Angeles Dodgers. His wager on the Pizza Hut franchisee, one of his most recent, is also one of the most troubled. After tapping a bank credit line to acquire additional restaurant locations last year, NPC will likely need new equity to help finance investments and avoid breaching a covenant on the revolver, according to credit rating companies.

Earlier this year, Eldridge and a co-investor pledged to inject as much as $60 million of additional cash into NPC, which also operates Wendy’s Co. restaurants, according to people with knowledge of the company’s financials. In May the company told investors only $9.5 million had been contributed and that the remaining $50 million would be disbursed “as needed,” the people said.

Eldridge has indicated to investors that it remains supportive of NPC and its management team, and that it will continue to help the company reposition its business and upgrade its assets, one of the people said.

A spokeswoman for Eldridge declined to comment, while NPC didn’t respond to telephone and email requests seeking comment.

Some of the challenges NPC is facing are not unique to the company.

Rising wages and food prices have kept profit margins under pressure at fast-food chains across the U.S. in recent years, while a deadly pig virus that is quickly spreading across the globe could inflict even more pain on the industry, according to Bryan Hunt, a restaurant analyst at Wells Fargo Securities LLC.

“The biggest problem for fast food operators is labor, but I believe more food inflation is going to kick in during the second half,” Hunt said. “The magnitude of the swine flu epidemic in Asia is staggering. Pizza toppings such as pepperoni, sausage and ham could become a lot more expensive.”

If that weren’t enough, competition in the restaurant business is intensifying as the rise of meal delivery apps from the likes of GrubHub Inc. and Uber Technologies Inc. expand consumer dining choices. That’s pressuring Pizza Hut operators such as NPC to cut back on the chain’s iconic red roof restaurants and invest in smaller locations focused on delivery.

Pizza Hut restaurants in the U.S. are in many cases “not in the right part of the trade area, dated and potentially in need of a remodel,” David Gibbs, the president of Pizza Hut brand owner Yum! Brands Inc., said at a conference last month.

NPC had little trouble refinancing its debt when it tapped institutional investors for $740 million in March of 2017. It even got more advantageous terms than originally anticipated. But its large debt load has now become an obstacle to much-needed investment.

“NPC’s capital structure is potentially unsustainable given tightening covenant headroom, increased reliance on the revolver to fund capital expenditures, and very high leverage we expect will remain above 8 times,” S&P Global Ratings said in an April report in which it cut the company’s credit rating to CCC+.

A covenant on NPC’s $100 million revolver requires the company to keep its debt-to-earnings ratio below 7 times when it borrows more than 35% of the credit line. NPC has so far managed to remain in compliance with the covenant, even as a key measure of earnings dropped about 20% from a year earlier in the first quarter, the people familiar said.

NPC reported leverage of 6.3 times in the period, one of the people said. Rating companies typically use more restrictive criteria than those included in loan and bond documents when calculating leverage.

Eldridge and its co-investor Delaware Holdings LLC agreed to buy NPC from private equity firm Olympus Partners for about $1.2 billion in 2017. The new private equity owners paid $500 million in cash and obtained approval from lenders to assume the company’s existing debt.


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