Sbarro exit plan wins court approval

July 2014 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

The bankruptcy exit plan of pizza chain Sbarro LLC has won approval from a US bankruptcy judge, ending the company’s two month spell in bankruptcy protection. The decision to approve Sbarro’s plan, taken by Judge Martin Glenn of Manhattan bankruptcy court, will allow the firm to move forward with its latest restructuring plan and end its second bankruptcy in three years.

The firm filed for Chapter 11 bankruptcy protection in early March having agreed a pre-packaged restructuring with many of its creditors. At the time of the bankruptcy filing Sbarro claimed that its debt was ‘unsustainable’. In its bankruptcy filing, the firm listed assets of $175.4m and liabilities of $165.2m. In its court documentation, Sbarro cited a huge decline in customer traffic in shopping mall food courts, where many of its stores do business, as the main reason for the firm’s bankruptcy. While completing the company’s pre-packaged bankruptcy scheme, Sbarro also chose to pursue a parallel restructuring option. The firm explored the option of auctioning off a number of its assets, however the mooted auction was unsuccessful, attracting no bidders willing to meet a $55.5m minimum threshold for competing offers. As a result, Sbarro opted to proceed with the pre-packaged restructuring instead.

Sbarro’s restructuring plan will see the company’s existing debt pile cut by over 85 percent, from $148m to around $20m, which is comprised of an exit loan converted from its debtor-in-possession (DIP) financing. The DIP from secured lenders Apollo Debt Advisors LLC, Babson Capital Management LLC, Centre Lane Partners LLC, Fort Hill Investment Partners LLC, Guggenheim Investment Management LLC and Whippoorwill Associates Inc includes two $10m term loans which will be drawn on the closing date of the DIP and within two days of the final DIP order, respectively.

Under the terms of the restructuring plan, the firm’s general unsecured creditors will receive around $1.25m. Sbarro’s general unsecured creditors, which include landlords and food suppliers, were initially unwilling to agree to the firm’s initial restructuring plan, which would have left them with nothing. In a statement announcing the court’s decision, Sbarro noted that the broad support its restructuring plan has received from the company’s various creditors “has enabled the court to move swiftly to confirm the reorganisation plan, which is the blueprint we will use to invest in and grow the business. Sbarro remains a vibrant brand with more than 800 restaurants in more than 40 countries, and we can now begin aggressive implementation of our growth strategy for the future”.

Under the terms of the firm’s pre-packaged bankruptcy, Sbarro was required to close around 180 of its portfolio of approximately 400 North American restaurants, the remainder of the firm’s properties operated as normal throughout the bankruptcy proceedings. The bankruptcy proceedings have not affected any of Sbarro’s 600 franchise locations worldwide. David Meyer, a partner at Kirkland & Ellis who represented Sbarro, said in court that the firm’s bankruptcy plan achieves its goals “to deleverage the company’s capital structure, streamline operations, maximise value for all stakeholders” and “best position the company to compete in the evolving quick-service restaurant industry”. As a result of the reorganisation, Sbarro’s earnings are expected to double by 2018, having been projected to reach $19.2m – up from $9.54m this year.

Sbarro, which was acquired by American PE firm MidOcean Partners LP in 2007 for $417m, initially filed for Chapter 11 bankruptcy protection in April 2011 as a result of steep increases in ingredients and changing consumer habits. The firm emerged from its first bout of bankruptcy in November of the same year having eliminated around 70 percent of its $486.6m debt load. The company’s first lien lenders took ownership of Sbarro as part of the firm’s reorganisation plan.

Richard Summerfield