Proposed $1.5 million loan would help preserve assets and pursue a buyer after all 169 restaurants closed
Banco Popular has agreed to provide up to $1.5 million in debtor-in-possession (DIP) financing to bankrupt restaurant operator Encanto Restaurants Inc., giving the company a short financial runway to preserve assets and pursue a potential sale after the collapse of its KFC, Taco Bell and Pizza Hut operations in Puerto Rico.
The financing request, filed Nov. 10 in the U.S. Bankruptcy Court for the District of Puerto Rico, would initially make $376,000 available during the first two weeks of the Chapter 11 case to cover payroll, occupancy costs, essential services and other bankruptcy-related expenses. The company says it entered bankruptcy with only about $44,000 in cash and no operating revenue after shutting down all of its restaurants.
The filing offers the clearest picture yet of Encanto’s financial condition following the abrupt termination of its KFC and Taco Bell franchise agreements by Yum! Brands affiliates on Nov. 1. According to court documents, the franchise terminations forced Encanto to begin closing restaurants on Nov. 2, and by the time it sought Chapter 11 protection on Nov. 5, all 169 restaurants operating under the KFC, Taco Bell and Pizza Hut brands had ceased operations, and most employees had been laid off.
Encanto said the shutdown followed months of worsening liquidity problems that left it facing numerous complaints from landlords and other creditors over unpaid obligations. The company maintains that it was pushed into bankruptcy to preserve the value of its remaining assets, including leasehold interests and potential legal claims, while exploring a sale process.
Court documents show Banco Popular, which is owed $87.7 million, took several steps to keep the company afloat before the bankruptcy filing. According to the motion, Banco Popular granted payment moratoriums, reduced interest rates on a temporary basis, entered into a forbearance agreement and approved overdraft advances. In late October, the bank also provided a $544,000 protective advance to cure delinquent rent at 12 restaurant locations and prevent eviction proceedings.
Under the proposed financing structure, Banco Popular would provide new post-petition funding while also converting portions of its existing debt into post-petition obligations through a so-called “roll-up” mechanism. The arrangement would give the lender enhanced protections and priority repayment status during the bankruptcy case. The company described the financing as the only funding source available given that it has ceased operations and that nearly all of its assets already serve as collateral for Banco Popular’s loans.
The proposed loan carries a 12% annual interest rate on new money advanced and would mature as early as Nov. 30, unless additional funding is approved or extended.
Encanto said it plans to use the initial funding period to continue discussions with potential buyers and seek court approval for sale procedures. The company indicated that if a viable transaction emerges, it may seek additional financing from Banco Popular to support the sale process through closing.
The filing also preserves potential claims against Yum! Brands affiliates related to the disputed termination of the KFC and Taco Bell franchise agreements. Encanto and Banco Popular expressly stated they are not conceding the validity of the terminations and are reserving all rights and remedies relating to those agreements.
A bankruptcy judge is being asked to approve the interim financing on an emergency basis by Nov. 13, with a final hearing, if needed, scheduled no later than Nov. 24. Encanto argues that without immediate access to the funds, it could be unable to meet payroll and preserve remaining assets, jeopardizing any effort to maximize value through a sale.
