Chilango’s auditor has declined to sign off its accounts six months after the fast-food chain raised £3.7m by selling controversial “burrito bonds” to hundreds of small investors.
Chilango has hired restructuring advisers RSM to conduct a full review of its options. It is considering a range of options including raising new capital or a sale as part of a pre-pack administration, according to one person with knowledge of the situation. RSM said it had been engaged to “assist on long-term planning, options and strategy”.
Chilango’s auditor, Grant Thornton, is “not willing” to sign off the accounts of the Mexican food chain’s funding entity — due to be filed six weeks ago — because of a “risk related to going concern”, according to one person close to the matter.
The restaurant group, which is headquartered in north London, has 12 sites in the UK. It was founded in 2007 by Eric Partaker and Dan Houghton. Mr Partaker, chief executive, said the company was working with its auditors to publish the accounts “as soon as possible”.
Chilango was a pioneer of “crowd-funded” mini-bonds — investments that offer regular returns by lending to companies, but which have few of the legal protections of large-scale institutional bonds. It first tapped up its customers for more than £2.1m funding five years ago, with investors relying on colourful marketing documents that were light on financial detail.
Such investments have come under added scrutiny this year after the collapse of London Capital & Finance, which left 11,500 people facing losses of about 80 per cent on the £236m they ploughed into its mini-bonds. The Financial Conduct Authority has previously raised concerns that small investors are not aware of the risks of mini-bonds.
Chilango launched its second “burrito bond” in October last year, which promised investors annual returns of 8 per cent and “free food for four years”. It said the capital would be used to refinance its existing debt and open more restaurants.
The company said in April that the oversubscribed bond had raised more than £3.7m from about 800 investors, including 194 who invested more than £10,000 each in order to qualify for a Chilango “black card” entitling them to one free burrito a week.
The terms and conditions of the bond allow Chilango to cancel this promotion at any time, however, and the documents warned investors to keep their cards safe as the company “can’t issue a replacement”.
Chilango’s marketing material for the bond claimed it had generated more than £2m in what it called “restaurant ebitda” in its 2018 financial year, an earnings measure that excluded numerous costs involved in running its business. The accounts of parent company Mucho Mas Ltd show the business lost nearly £500,000 on an accounting ebitda basis during that period, while booking an operating loss of more than £1m.
Chilango highlighted the risks to potential investors last year, warning them they could “lose some or all of your investment”.
Because the retail-targeted bonds lack the protections of debt sold to institutional investors, they could easily be wiped in a restructuring, particularly as Chilango has a loan from HSBC that ranks ahead of the mini-bonds.
Grant Thornton’s refusal to sign the accounts comes as the UK’s largest audit firms are applying an enhanced level of scrutiny to company books amid renewed regulatory and political focus on the sector. Auditors have faced calls to be broken up after accounting scandals and high-profile corporate collapses at companies including Patisserie Valerie, Carillion and BHS.
Grant Thornton declined to comment.