Sbarro Inc. proposed Tuesday to exit Chapter 11 bankruptcy by filing a joint plan of reorganization that would cut its debt by 73 percent, or $295 million, to a $110 million senior secured exit term loan facility.
The operator or franchisor of more than 1,000 quick-service Italian restaurants said the proposal is subject to an overbid process, which allows Sbarro’s creditors to maximize their recovery of the company’s $405 million in debt.
The plan, which also includes a related disclosure statement, was filed with the U.S. Bankruptcy Court for the Southern District of New York.
Sbarro’s first-lien lenders approved the plan, upon completion of which they would own substantially all of the company’s equity. The lenders also have committed to provide Sbarro with a new $18.6-million term loan facility to provide sufficient working capital for the chain once it emerges from bankruptcy.
A hearing to consider approval for the reorganization is scheduled for Sept. 7. Sbarro Inc. filed for bankruptcy April 4.
“The plan gives us a clear path to emerge from the bankruptcy process with significantly reduced debt and increased financial flexibility and liquidity,” said Nicholas McGrane, interim president and chief executive.
“Sbarro continues to perform well, experiencing positive same-store sales and outpacing mall traffic for the first half of 2011,” McGrane said. “As we seek to implement our balance sheet restructuring, Sbarro’s restaurants will continue to operate in the normal course and without interruption and will be positioned to compete more effectively going forward.”
Sbarro proposed three steps in its reorganization:
• First, the outstanding amount of a $35-million post-petition debtor-in-possession facility — which had been backstopped by major stakeholders Ares Corporate Opportunities Fund II LP and MidOcean Partners III LP — would be converted to an equal amount in the newly issued $110-million exit term loan facility.
• Second, approximately $173 million in prepetition senior secured debt help by the first-lien lenders would be converted into the balance of the exit term loan facility and 100 percent of the common equity of Sbarro Inc.
• Finally, all other outstanding debts would be eliminated.
Sbarro also said it would file a motion to approve bids and establish an auction process for interested investors to exceed the price of the proposal in the company’s current plan while the Chapter 11 case is still pending in court. The process would allow qualified bidders to benefit from a $110 million “stapled” financing option offered by Sbarro’s first-lien lenders to support a qualified overbid.
Sbarro was founded in 1956 in Brooklyn, N.Y. It went public in 1985 and then was taken private by the Sbarro family in 1999. MidOcean Partners acquired Sbarro in 2007 in a buyout reportedly valued at more than $400 million.
The company said the recession and slow recovery of the past few years hurt shopping mall traffic, pressuring guest counts and sales at Sbarro and prompting a turnaround plan in 2010 that included the installation of McGrane, a MidOcean managing partner, as chief executive.
Melville, N.Y.-based Sbarro has restaurants in more than 40 countries.
— Mark Brandau