Private Debt Funds

Third Eye Capital and the fall of the Buca restaurant empire

Third Eye Capital's involvement in the spectacular collapse of the restaurant empire comprising Buca, La Banaane, Jacobs & Co and Jamie's Italian.
OPM 5 min read

Toronto Life had an article on the fall of the King Street Food Group.  It portrays a badly mismanaged, chaotic restaurant operation that overreached.  Among other things that went wrong, King Street brought the ill-fated Jamie's Italian to Toronto.Third Eye Capital was there to fund this expansion, first extending a $14.2m loan in 2015.  That loan came at a 12% interest rate.  In total, with accrued interest, Third Eye would end up being owed $38m.  Most of the assets of King Street Food Group are now owned by Third Eye Capital investors, following a CCAA procedure.  The story raises significant questions about Third Eye's underwriting and monitoring of its borrowers, as well as the practice of throwing good money after bad.

Some excerpts from the article relevant to Third Eye Capital:

Above and beyond its interest rate, Bhalwani’s company found other ways to sweeten its end of the deal. Third Eye took back $520,000 right off the top of its loan to King Street in deal fees, a kind of thanks-for-doing-business-how-do-you-do. The lenders added a kicker, too, a warrant to purchase up to a fifth of King Street’s shares, which it could flip if a suitor came along and bought the company out...

The firm’s suppliers started calling her in distress. The invoices they’d sent were four months past due. So Keenlyside dispatched a staffer to King Street headquarters. The staffer said she found the chocolate company’s unpaid invoices jumbled in a plastic shopping bag under one of the accountants’ desks....

At Jacobs, the company’s cash-spinning steakhouse, business kept rolling on as well as ever. They routinely sold out of $1,200 Wagyu rib-eyes, and the sommeliers poured Domaine de la Romanée-Conti by the $400 glass. But the steakhouse’s suppliers were growing surly about King Street’s payment delays. The service staff nearly ran out of forks one night after their cutlery vendor cut them off. That can be hard to explain to the table that’s sitting over a steak as pricey as a flight to Japan. At Buca Yorkville, wine vendors routinely barred the place from their most in-demand bottles for lack of payment....

At that point, King Street had bigger problems than paying for mushrooms. Not six months after it signed its loan deal with Third Eye, the company started defaulting. Tsebelis, Giazitzidis and Gentile quickly went back for a $390,000 bump. Third Eye charged a nearly 20 per cent “amendment fee” right off the top, keeping $75,000 of that loan for itself....

The partners went back a dozen times in the ensuing years, for all manner of reasons: to fund new places, buy out shareholders and repay suppliers. They borrowed more and more from Third Eye, even, to catch up on tax arrears and cover overdue Third Eye loan payments—the finance-world version of drinking yourself silly in the morning to cure the hangover from the night before....

By this point in King Street’s troubles, someone should have hit reset. “A lender should have noted, ‘Hey guys, you’re having some challenges with some of your core stores here, I think it’s time to pump the brakes a bit, focus on operations,’ ” says Jacob Mancini, whose restaurant finance group at the Canadian Western Bank funds a who’s-who of top Canadian hospitality brands.

Instead, with Third Eye’s backing, the partners signed a dizzying array of restaurant, retail and kitchen deals: in the Park Hyatt Hotel (where they planned a Japanese restaurant) and the Globe and Mail building (a central commissary and restaurant), at One Bloor West (multiple full-service restaurants, plus an upscale café and event space), at CIBC Square and Brookfield Place (one restaurant apiece), at Yonge and St. Clair (Cucina Buca), Yonge and Eglinton (Bar Buca), and north of the city, in a condo development in Vaughan (Buca and Bar Buca). All told, they signed new leases for some 100,000 square feet of prime commercial real estate—enough space to fit Buca Yorkville nearly 30 times.

“How on earth would they have the comfort that they would be able to open those locations?” asks Mancini, the financier. “When they weren’t making payments?”

King Street, by this point, was $22 million in debt to Third Eye. Its defaults filled a third of a page of the loan amendments: “failure to service the monthly interest obligations,” “failure to deliver annual reporting,” “failure to comply with min. [earnings] covenant…” The problems piled on and on.

Tsebelis and Giazitzidis try a different tack: flattery and accommodation, followed closely by carefully constructed threats. “If we take this resignation now, we’ve got to tell everybody, got to tell Third Eye,” Tsebelis tells Olsen. “It’s just going to—the world will implode.”

“You’re going to have somebody like Third Eye chasing you down, making your life fucking miserable,” Tsebelis continues. “I’m not saying they will, but I can’t see how they wouldn’t. It’s not like you’re walking away from nothing. They’re owed money.”

King Street’s debt, including accrued interest, was $34.9 million; just two weeks before the shutdown, Tsebelis, Gentile and Giazitzidis had gone to Third Eye for yet another re-up, $4.6 million this time. Yet King Street’s obligations to its small suppliers were also mounting. By the fall of 2020, King Street owed $105,000 to the Royal Produce Company and $220,000 to its Jacobs and Co. landlords. It owed $345,000 to Woodward Meats and $46,000 to Diana’s Seafood. Marc Eber, the ever-faithful mushroom guy, was out $97,000.

Third Eye was among the first of King Street’s major creditors to blink after Covid hit. In April, the private equity lender called its loans. They would be due in full, it said, as of the end of June, as if the partners could just find that kind of money lying around.

Bhalwani, of Third Eye, also deflected blame for the creditor protection manoeuvring. The proceedings, he wrote, were “precipitated by impatient and unsympathetic landlords and contractors.” In fact, Third Eye, he implied, was the hero of this story. By continuing to provide King Street with capital and its “business expertise,” he said, “we have both preserved and created hundreds of jobs and are helping foster the economic vitality of our city.” (Neither Tsebelis, Giazitzidis nor Bhalwani agreed to be interviewed for this article.)

All of which is hard to square with what actually went down. Third Eye Capital, the $2.5-billion private equity fund, now effectively owns what’s left of King Street—minus all those lawsuits and the Jamie’s Italian albatrosses and the unpaid debts to several hundred suppliers. It got out of $2 million in unpaid invoices at Cucina Buca alone, from more than 50 trades and local suppliers, King Street’s so-called partners, who had provided them in good faith.

You can read the full story by Chris Nuttall-Smith here:

Inside the rise and fall of the Buca empire
For years, Buca was the place to go for glitzy, big-ticket nights out. How did the company wind up $35 million in debt?

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