Heart with Smart, the operator of Pizza Hut Restaurants, is negotiating with its lenders to refinance £30.9m of loan notes and its lending covenants.

Due to the “unprecedented inflationary pressures” which emerged in 2022, the directors of the company anticipated a potential breach of its covenants, and have agreed a temporary revised covenant structure for 2023 while negotiations are underway.

Company directors have considered a “severe but plausible” downside scenario in which guest demand declines sharply during the summer of 2023, reaching a low point in October, before recovering in summer 2024.

This scenario would require significant tightening of discretionary spending with liquidity reducing significantly, and a least two development projects would need to be deferred.

The company said it does not anticipate any breach, other than in this scenario, according to accounts filed at Companies House.

The group said it has an “excellent” relationship with lenders, some of whom have equity in the group.

Directors anticipate any potential breach would be waived, and expect the refinancing and loan notes will be agreed

However, before that happens, directors acknowledged there remains a risk.

The concern relates to intermediate parent undertaking HWS3 Group, which the company is a cross guarantor for.

Auditors said these conditions indicate the existence of a “material uncertainty”, which may cast “significant doubt” about the company’s ability to continue is a going concern.

The uncertainty was reported in Heart with Smart’s latest accounts for 2022, where the group reported a loss for the year of £177k (2021: loss of £297k)

At the balance sheet date, it operated 152 restaurants (2021: 169), while the itsu division ran four shops.

During the period, the company launched a £9.99 weekday buffet lunch and alt light lunch.

In Q4 it trialled an ‘all in’ evening buffet including unlimited pizza, pasta, salad, desert and a drink for under £20, so guests can “feel in control and avoid bill shock during these difficult times”.

Mobile ordering is being improved, and currently being used by 60% of guests, while the first phase of a kiosks trial under way.