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Author of the article:<\/p>\n
Barbara Shecter<\/span> <\/div><\/div>\n<\/picture>Mark McEwan, Canadian chef and Food Network star.<\/span> Photo by SunMediaArchive files<\/span> <\/figcaption><\/figure>\n<\/header>\n\nArticle content<\/h2>\n Mark McEwan has spent most of his career as a chef near the top of Canada\u2019s culinary food chain. His first solo restaurant, North 44, opened in north end Toronto in 1990 and served as the beachhead for what would become a food empire that spanned six restaurants, a catering and events business and a chain of fine-food supermarkets, all fuelled by high-profile television gigs.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n But despite that\u00a0prominent spot on Canada\u2019s food landscape, in late September \u2014 nearly a year and a half into the global coronavirus pandemic \u2014 McEwan revealed that all was not well with his empire.<\/p>\n
The business was facing a liquidity crunch and he and partner Fairfax Financial Holdings Ltd. were forced to seek court-monitored protection from creditors to undertake a major restructuring, viewed as the only option after they were \u201cunable to achieve a comprehensive out-of-court resolution that would secure the long term viability of the McEwan Group.\u201d<\/p>\n
In an affidavit filed with the court, McEwan says the company went that route only after unsuccessful talks with landlords to improve lease terms, reduce \u201cunsustainable\u201d obligations and exit unprofitable locations.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n McEwan\u2019s filing reverberated through the restaurant scene and insolvency circles, where the plight of the restaurant industry has been a hot topic during the pandemic.<\/p>\n
\u201cThe McEwan CCAA filing is clearly an indicator of larger challenges facing the restaurant and hospitality industry, as a result of the COVID-19 pandemic,\u201d said Linc Rogers, a partner in the insolvency and restructuring practice at law firm Blake, Cassels & Graydon LLP in Toronto.<\/p>\n
He noted that the court-monitored restructuring follows a string of creditor protection and insolvency filings by restaurants in Canada and the United States earlier in the pandemic, including Toronto\u2019s King Street Company Inc. \u2014 owner of the high-end Italian restaurant Buca and steakhouse Jacobs & Co.\u2014 and\u00a0U.S.-based chains\u00a0California Pizza Kitchen, Chuck E. Cheese and Ruby Tuesdays.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n The problems at McEwan pre-date the pandemic, with losses at some locations more than offsetting profits at the rest. The McEwan Group as a whole has not been profitable since 2017, according to its own filings, and its 2019 fiscal results carried a \u201cgoing concern\u201d note from auditors. But in court filings, the McEwan Group said \u201cthe significant and detrimental impacts of the COVID-19 pandemic\u201d had \u201cexacerbated\u201d the pre-existing issues and made a major restructuring necessary.<\/p>\n
On Oct. 15, the company will seek court approval for a plan to sell most of the assets to current shareholders Fairfax and McEwan himself, and to close unprofitable locations while continuing to operating a scaled-down franchise.<\/p>\n
Court documents show more than $10 million in liabilities outstanding, with money owed to banks, landlords and Fairfax, including $899,000 in unsecured borrowing from Royal Bank of Canada. McEwan, whose food empire includes Bymark restaurant in Toronto\u2019s Financial District, three Fabbrica restaurants, a 50 per cent stake in ONE restaurant in trendy Yorkville, and high-end grocery stores called McEwan Foods, secured some of the loans to the business against his personal assets, according to the filings in the Ontario Superior Court of Justice.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n Following the declaration of the global pandemic in March of 2020, the company adopted a \u201ccash conservation\u201d approach to deal with mandatory closures, restrictions on customer capacity, and suffered from reduced foot traffic as diners stayed home.<\/p>\n
The McEwan group also secured additional credit facilities, concessions from landlords, and government subsidies and support programs. But it\u00a0wasn\u2019t\u00a0enough, according to the court filings.<\/p>\n
The company had to take on even more debt, with no guarantee that it would be enough as capacity restrictions, staffing shortages and higher costs continued to be the order of the day in the industry.<\/p>\n
Losses more than doubled in 2020 to $2.8 million from $1.3 million in 2019.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n \u201cThere remains much uncertainty with respect to the ongoing COVID-19 pandemic and its continued impact on the McEwan Group and the restaurant industry as a whole,\u201d the company said in one court document, adding that it expects to require additional funding to continue operating until COVID-19 related factors \u201ccease negatively impacting the business and revenues improve more significantly.\u201d<\/p>\n
\nI fear for what happens when the government relief runs out<\/p>\n
Chad Finkelstein<\/p>\n<\/blockquote>\n
Chad Finkelstein, who deals with restaurants frequently in his practice with law firm Dale & Lessmann LLP in Toronto, said that cases as extreme as McEwan\u2019s remain mercifully rare 18 months into the pandemic \u2014 but that without government supports things might have been much worse.<\/p>\n
\u201cI fear for what happens when the government relief runs out,\u201d he said.\u00a0\u00a0\u201cIf we\u2019re not in a position where people can go back to seeing the restaurants at full capacity, and customers, you know, don\u2019t have the confidence to do it \u2026\u00a0\u00a0there may very well be more bankruptcies.\u201d<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n Finkelstein said restaurants, which have razor-thin margins in the best of times, have been hit with higher expenses during the pandemic, from additional cleaning and constructing partitions to meet COVID-19 health protocols, to food waste when operating and capacity restrictions were placed on them on short notice.<\/p>\n
\u201cThe additional expense these restaurants now have, just to survive, is overwhelming, so if not for government relief just to be able to afford to keep the lights on, they wouldn\u2019t be around.\u201d<\/p>\n
The Canada Emergency Wage Subsidy, one of the things that has helped keep many restaurant businesses afloat, is set to expire this month \u2014 though Prime Minister Justin Trudeau hinted this week that it could be extended yet again.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n McEwan laid off some 200 employees during the pandemic, but was able to bring back more than 170 as outdoor and dine-in services began to re-open in the greater Toronto area in the summer of 2021.<\/p>\n
Many restaurants, including McEwan\u2019s, have also been surviving by tapping the Canada Emergency Commercial Rent Assistance program and the Canada Emergency Business Account, which extended interest-free, partially forgivable loans of up to $60,000 to small businesses.<\/p>\n
The McEwan Group received a CEBA loan and $3.3 million in wage subsidies, as well as well as $300,000 in rent subsidies and some rent deferrals.<\/p>\n
Still, that wasn\u2019t enough to ward off its liquidity issues.<\/p>\n
Many eateries across the country are also struggling, according to industry group Restaurants Canada, which said this week that sixty per cent of table-service restaurants were operating at a loss in July.\u00a0Many\u00a0are having trouble recruiting staff, and the majority don\u2019t expect to reach pre-pandemic staffing levels until 2023.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n Rogers, the restructuring lawyer, said an end to government support programs for restaurants will be painful for some.<\/p>\n
\u201cCertainly once government support programs end for restaurants some inherent defects in the business model will come to the forefront,\u201d Rogers said.<\/p>\n
In its industry update this week, Restaurants Canada said this more than 12,000 food-service establishments have permanently closed their doors since the start of the pandemic. The industry group has been calling on the governments to create and implement targeted industry-specific aid in place for restaurants if and when other programs are allowed to conclude.<\/p>\n
Finkelstein said that will be crucial to keep the tremors felt in restructurings like the McEwan Group and King Street from spreading into a major fault line that swallows many more restaurants.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n \u201cIt was speculated throughout 2020 that it was going to be the norm, that 50 per cent or more restaurants, independent restaurants, would close,\u201d he said. \u201cFortunately, that has not been our experience, and why do you think that is? I would attribute it almost entirely to government relief.\u201d<\/p>\n
Early offers from investors and private equity groups to buy restaurant groups \u201cfor pennies on the dollar\u201d were rejected\u00a0because the operators still thought they could make it through on their own, but that view could change, Finkelstein said, adding that it can be hard to tell from the outside\u00a0who\u2019s thriving and who might be the next to run aground.<\/p>\n
While the average consumer might see busy restaurants that remain open and endure long waits for takeout and delivery and be lulled into thinking that all is well, behind that facade are high fixed costs, added expenses and the proliferation of costly but necessary order aggregators like UberEats and Skip the Dishes are taking a toll on already thin margins.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n<\/p>\n\n Canada’s surprise jobs surge recoups pandemic losses <\/span><\/h3>\n<\/li>\n ‘A panic situation’: Oat milk, cold cereal sticker shock looms after oat-killing drought hits supply <\/span><\/h3>\n<\/li>\n Bank of Canada’s Tiff Macklem urges calm, says price spikes still look transitory <\/span><\/h3>\n<\/li>\n<\/ol>\n<\/section>\n\u201cYou see that restaurants are allowed to reopen in different ways and there\u2019s lineups and it\u2019s hard to get a reservation, you see that you\u2019re sitting at home and you are ordering tons of delivery and your delivery takes like an hour and so you think, \u2018Wow, they must all be doing really, really well\u2019,\u201d he said. \u201cThey are really busy. Not all are doing very well.\u201d<\/p>\n
Rogers, too, said it is difficult to place a value on the businesses right now, something put into sharp relief by the case of the McEwan Group, which is looking to use the insolvency process to sell the viable assets to the existing equity owners.<\/p>\n<\/section>\n
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This advertisement has not loaded yet, but your article continues below. <\/p>\n<\/p><\/div><\/div><\/div><\/div>\n<\/section>\n<\/div>\n\nArticle content<\/h2>\n \u201cIn the best of times it is challenging for third-party distressed investors to value insolvent businesses on a go forward basis,\u201d he said. \u201cThat challenge is magnified by the pandemic because even after the pandemic wanes \u2014 let\u2019s assume that it will \u2014 it is unclear if new habits developed by consumers will persist and what the implications of that will be.\u201d<\/p>\n
Rogers, for example, wonders if takeout trends last, and whether workers ever return en masse to the downtown core.<\/p>\n
\u201c(It\u2019s) hard to predict what the economic effect of that will be and extremely hard to predict in the long term.\u201d<\/p>\n
\u2022 Email: bshecter@nationalpost.com | Twitter: