In April's piece entitled "🍟Casual Dining is a Hot Mess🍟" and then in a follow-up in July creatively and originally entitled "🍟Casual Dining Continues to = a Hot Mess🍟" we noted that...well...casual dining is a hot mess. As of today…A. Spicy. Hot. Mess. Actually.
Late last night, RM Holdco LLC, the owner of a portfolio of 69 company-operated and 11 franchised restaurants and contemporary taquerías including Chevy's Fresh Mex, Siniqual, El Torito Grill, Las Brisas and Alcapulco filed for bankruptcy to effectuate a "363 sale" of substantially all of its assets to an affiliate of one of its pre-petition equityholders, Z Capital Partners LLC for $46.75mm. Interestingly, this filing also marks the third — that’s right, THIRD — chapter 22 filing in the last week following Home Heritage Group Inc. and Brookstone Inc. This is how we previously described a “Chapter 22”:
For the uninitiated, Chapter 22 in bankruptcy doesn’t actually exist. It is a somewhat snarky term to describe companies that have round-tripped back into chapter 11 after a previous stint in bankruptcy court.
Real Mex previously filed for bankruptcy in October 2011 and sold to Z Capital and Tennenbaum Capital Partners LLC in March 2012. At the time of that previous chapter 11 filing, the company operated approximately 128 restaurants.
This time, the signs of an imminent bankruptcy filing were out there shining for all to see as the company has been sending smoke signals for months. Back in May, Bloombergreported that the company hired Piper Jaffray to pursue a sale — including one that could be consummated in bankruptcy. Thereafter, in June, the company filed a WARN Notice with the Department of Labor indicating that it intends to close its Times Square location and lay off 134 employees. Perhaps the signs were in place even earlier when the company hired the former CFO of Wet Seal, a retailer that, itself, found its way into bankruptcy court twice.
The company highlights various macro factors as reasons for this chapter 11 filing:
For the past six (6) years, the Debtors have struggled with certain industry-wide and company-specific pressures that have negatively impacted their operations. Trends in the greater restaurant industry, including increases to minimum wage and commodity costs, have created substantial pressure on the entire sector, as evidenced by the numerous brands that have filed for bankruptcy in recent years, including Ignite Restaurant Group (Brick House and Joe’s Crab Shack), Macaroni Grill, Garden Fresh, Bertucci’s, Crumbs, Cosi, and Buffets.
In addition, increased competition, especially in the form of available, quality Mexican fast casual options, has had a significant impact on traffic in the Debtors’ restaurants.
For anyone keeping track of the “What Caused Bankruptcy” standings, this would be Amazon Inc. ($AMZN) 282,499,209 and (now) Chipotle Inc. ($CMG) 1.
Compounding matters here is (i) the company’s $200+ million in debt, (ii) an expensive workers’ compensation program, (iii) long-term lease burden (it leases all of its locations, the majority if which are in California), (iv) an expensive-yet-unconsummated-growth-strategy (the company attempted but failed to pursue expensive M&A processes with bankrupted Garden Fresh Restaurant Intermediate Holdings, among others), and (v) poor risk management procedures. On the latter point, it seems the company was a wee bit cavalier about not-at-all-serious matters like alcohol awareness, sexual harassment and food handling safety; therefore, it “experienced higher-than-normal litigation and enforcement-related expenses.” Yikes.
Now, back in October 2016 — in the context of Garden Fresh’s chapter 11 filing — we asked “Are Progressives Bankrupting Restaurants?” Therein we highlighted the following:
…Morberg's explanation for the bankruptcy went a step farther. He noted that cash flow pressures also came from increased workers' compensation costs, annual rent increases, minimum wage increases in the markets they serve, and higher health benefit costs -- a damning assessment of popular progressive initiatives making the rounds this campaign season. And certainly not a minor statement to make in a sworn declaration.
It's unlikely that this is the last restaurant bankruptcy in the near term. Will the next one also delineate progressive policies as a root cause? It seems likely.
Points for PETITION’s bullseye?
Notably, here, the company also underscores that employee costs were a significant contributor to its liquidity constraints. It states:
While struggling with the specific issues discussed above, the Debtors have also suffered from rising employee wage costs, which are particularly high in California, where the vast majority of the Debtors’ restaurants are located. In an attempt to minimize these costs, the Debtors have implemented a scheduling program that has reduced employee hours and has optimized both front-of-house and back-of-house staffing.
Welcome to the party, Mr. Unintended Consequences.
The company seeks to use the bankruptcy process to effectuate the afore-mentioned sale to Z Capital. While the purchase price is a mere fraction of the debt on balance sheet, Z Capital’s proposed stalking horse asset purchase agreement also provides that it will “offer employment to all Company employees at purchased restaurants who are employed at the closing, and may offer employment to other Company employees as well.” In other words, this may be one of those instances where the funds lose on their investments but the (remaining) employees come out relatively okay. Z Capital and Tennenbaum are also providing the company with a $5.5mm DIP credit facility to finance operations during course of the cases.
Jurisdiction: D. of Delaware (Judge [ ])
Capital Structure: $41.7mm first lien credit facility (Wells Fargo Bank NA), $195.1mm second lien credit facility (Wells Fargo Bank NA), $17.53mm in secured reimbursement obligation loans (from Letters of Credit), $53.62mm unsecured subordinated convertible debt (Z Capital = large holder)
Legal: Sidley Austin LLP (Vijay Sekhon, Christina Craige, Ariella Thal Simonds) & (local) Young Conaway Stargatt & Taylor LLP (Robert Brady, Elizabeth Justison, Andrew Magaziner, Edmon Morton, Michael Nestor)
Financial Advisor: Alvarez & Marsal LLC (Jonathan Tibus)
Investment Banker: Piper Jaffray & Co. (Jean Hosty, Terri Stratton, Michael Sutter)
Claims Agent: KCC (*click on company name above for free docket access)
Other Parties in Interest:
Stalking Horse Bidder & DIP Lender: Z Capital Group LLC (Legal: Cleary Gottlieb Steen & Hamilton LLP & (local) Morris Nichols Arsht & Tunnell LLP)
DIP Lender: Tennenbaum Capital Partners (Legal: Schulte Roth & Zabel LLP & (local) Landis Rath & Cobb LLP)
DIP Agent: Wells Fargo Bank NA (Thompson & Hine LLP)