New Chapter 11 Bankruptcy Filing - Cafe Holdings Corp.

Cafe Holdings Corp.

November 15, 2018

Source: Fatz.com

Source: Fatz.com

Anyone interested in a game of hot potato?

Cafe Holdings Corp. is a privately-owned chain of fast casual dining restaurants called Fatz Cafe. Fatz Cafe has 38 locations across 5 states and, as you can surely note from the image above, has an abundance of potato options on its menu. And it, in this scenario, is the hot potato.

The company filed for bankruptcy in the District of South Carolina earlier this week — exhibiting yet another sign, as PETITION has discussed at length previously, that casual dining is a really tough space right now. The company, itself, acknowledges:

Over the past several years, casual dining chains have experienced strong headwinds due to a combination of shifting consumer tastes and preferences, growth in labor and commodity costs, increased competition, and unfavorable lease terms. Indeed, a number of national and regional restaurant chains – including Real Mex Restaurants, certain Applebee’s franchisees, Ignite Restaurant Group, Macaroni Grill, Garden Fresh, Bertucci’s, and Logan’s – have buckled under these secular pressures and were forced to restructure their balance sheets and operations through a chapter 11 bankruptcy.

The company blames its unsustainable $30mm capital structure, “industry-wide challenges, trade market changes and challenges, underperforming strategic initiatives, and unsatisfactory business performance.” All of this is despite efforts to run the typical distressed restaurant playbook: install new management, refinance debt, restructure leases, shutter underperforming locations, deploy overhead rationalization, innovate around new product and promotional strategies, update the menu, invest in tech, renegotiate with vendors, etc. PETITION Note: nothing in the standard playbook can do anything about the fact that there are just far too many dining options available to consumers today. Period. The company’s consolidated adjusted network-wide EBITDA for the 12 months ended September 2018 and the fiscal year ended 2017 were approximately ($635,087) and $1.40 million, respectively.

And so the company turned to the next page in the playbook: a marketed sale. Yet, despite outreach to more than 200 parties, including both potential financial and strategic partners, the company didn’t generate any bids. Then comes the hot potato:

Unfortunately, after months of effort and outreach to more than 200 parties, including both potential financial and strategic purchasers, the Company was not able to obtain any bids for the Fatz assets. Moreover, the Company’s then first lien lender, Madison Capital Funding LLC (“Madison”), informed the Company that it did not wish to offer financing or serve as a stalking horse bidder in a chapter 11 sale process, and ultimately sold its debt position to Shrayne Capital, LLC (“Shrayne”). After further diligence, ultimately Shrayne decided it also did not wish to serve as a stalking horse bidder in a chapter 11 sale process and, in turn, sold its position to Atalaya Capital Management, LP and certain of its affiliates (collectively, “Atalaya”), who agreed to provide debtor in possession financing and to serve as a stalking horse bidder in a section 363 sale of substantially all of the Company’s assets.

You have to think that Atalaya Capital Management got that first lien paper at a meaningful discount to face value. Indeed, Shrayne only owned the paper for 5 weeks and then ran for the hills. Atalaya will provide the company with a $3.2mm DIP and, though the company has not filed its bidding procedures or stalking horse asset purchase agreement, presumably credit bid its debt to own the company out of Chapter 11. Now, for the uninitiated, the bankruptcy code permits a creditor to “credit bid” its debt, which is basically, as payment, exchanging a claim for the assets. A creditor can do that to the full extent of the claim, regardless of the the price said creditor paid for that claim. In other words, Atalaya may have paid Shrayne $0.01 for the first lien paper but because the face value of the first lien paper is $9.7mm, Atalaya can, but doesn’t have to, “bid” up to $9.7mm of that claim (like a coupon, in effect) for the company. Alternatively, it can provide the $3.2mm DIP credit facility and just credit bid that amount. There are a number of ways that this can be structured. Suffice it to say that Atalaya will need to infuse the business with capital if it wants it to have a fighting chance but it is under no obligation to cover and pay down the full extent of the debt. Indeed, the junior lenders and the ~63.5% equityholder, Milestone Partners III LP I and II, can effectively kiss their investments goodbye.

Opportunistic players who love feasting on the restaurant space will continue to have an abundance of opportunities like this one.

  • Jurisdiction: D. of South Carolina

  • Capital Structure: $9.7mm first lien (Atalaya Capital Management), $2mm second lien, $17.5mm mezzanine unsecured loan, $1.9mm unsecured subordinated note

  • Company Professionals:

    • Legal: Haynes and Boone LLP (Ian Peck, J. Fraser Murphy, David Staab) and (local) McNair Law Firm PA (Michael Weaver, Robin Stanton, Weyman Carter)

    • Financial Advisor: Loughlin Management Partners & Co.

    • Investment Banker: Duff & Phelps LLC (Vin Batra)

    • Claims Agent: Donlin Recano & Company Inc. (*click on company name above for free docket access)

  • Other Parties in Interest:

Updated 11/17/18

New Chapter 11 Filing - RMH Franchise Holdings, Inc.

RMH Franchise Holdings, Inc.

05/08/18

In 🍟Casual Dining is a Hot Mess🍟, we wrote:

…don’t let the lull in restaurant activity fool you. As we’ve stated before, this is a space worth watching given intense competition and the rise of food delivery and meal kit services - both direct-to-consumer and in-grocery.

Looks like we spoke to soon about a lull. Earlier this week RMH Franchise Holdings Inc. filed for bankruptcy in the District of Delaware. If you’ve never heard of RMH Franchise Holdings Inc., have no fear. You haven’t. Nor had we. But it is purportedly the second largest franchisee operator of Applebee’s Neighborhood Grill & Bar restaurants, operating 159 restaurants across 15 states. The company represents a bit less than 10% of all Applebee’s locations. RMH cobbled together this footprint after a string of acquisitions between 2012 and 2015, growing quickly and expanding its geographical scope.

Alas, Applebee’s is a casual dining establishment and, as previously covered, casual dining is struggling. The company notes,

…significant challenges encountered by the Applebee’s brand generally, and specific managerial decisions made on behalf of it by its franchisor, Applebee’s International, Inc. (the “Franchisor”), have negatively impacted the Debtors’ business operations and left them facing near-term liquidity issues.

These numbers paint a stark picture:

For the trailing twelve months ending March 31, 2018,4 the Debtors generated approximately $375.9 million in gross revenue, and $12.6 million of EBITDA, on a consolidated basis, a drop of roughly 60% in two years from the Debtors’ peak of $431.1 million and $31.4 million, respectively, in the twelve months ending March 31, 2016.

60%. Sixty…percent. Y.I.K.E.S. Much of this is attributable to a steep decline in same store sales over a period of years.

It is apparently also attributable to misguided directives from Applebee’s International Inc. (“AI”), the franchisor. Efforts to convert to wood-fired grill platforms and engage consumers with new ad campaigns flopped, despite the additional capital expenditures that those efforts required. In addition,

These difficulties were exacerbated by generally increased food costs, higher minimum wage rates and other labor costs, and increasing rents.

Consequently, the company spent the last year trying to improve operational efficiency and reduce operating expenses. It (and its agent Hilco Real Estate LLC) renegotiated leases with landlords, shed underperforming locations and negotiated with the corporate overlords to reduce corporate expenses. What it didn’t secure, however, was a long-term definitive agreement with Applebee’s International Inc. (“AI”). Instead, AI indicated that intends to issue a notice of termination of the company’s franchise rights in Arizona and Texas. That, friends, is what you call capitulation.

And the result, friends, is a crash landing into bankruptcy to trigger the automatic stay. Now the company will shed additional leases, negotiate with AI, and determine what options remain for a casual dining establishment that faces a headwinds coming multiple directions.

  • Jurisdiction: D. of Delaware (Judge Shannon)
  • Capital Structure: $68.4mm debt (Bank of America), $30mm (BMO Harris Bank NA)    
  • Company Professionals:
    • Legal: Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Kenneth Enos, Robert F. Poppiti, Jr., Justin H. Rucki, Tara C. Pakrouh)
    • Financial Advisor: Mastodon Ventures Inc.
    • Real Estate Advisor: Hilco Real Estate LLC
    • Claims Agent: Prime Clerk LLC (*click on case name above for free docket access).
  • Other Parties in Interest:

New Chapter 11 Filing - Bertucci's Holdings, Inc.

4/16/18

Bertucci's, the well-known Massachusetts-based restaurant chain with 59 casual family dining restaurants has filed for bankruptcy in order to effectuate sale to Right Lane Dough Acquisition, LLC. The company is owned by an affiliate of Levine Leichtman Capital Partners

As we discussed in a recent Members'-only write-up, the casual dining space has been under siege for some time. The company notes,

"With the rise in popularity of quick-casual restaurants and oversaturation of the restaurant industry as a whole, Bertucci’s – and the casual family dining sector in general – has been affected by a prolonged negative operating trend in an ever increasing competitive price environment. Consumers have more options than ever for spending discretionary income, and their preferences continue to shift towards cheaper, faster alternatives. Since 2011, Bertucci’s has experienced a year-over-year decline in sales and revenue."

To combat these trends, the restaurant implemented what seemingly every company selling a product is trying today: experiential something-or-other. It brought back its original executive chef and deployed quarterly food and wine pairings, specialty menus, express lunches and wine specials to draw and cultivate customers. Taking a page out of Domino's book, it also invested in and launched a mobile app. These measures -- along with attempts to streamline operational costs and re-negotiate leases -- were meant to help stop the bleeding. While millions of dollars of costs were taken out and 29 unprofitable leases identified (all of which the company intends to reject immediately), revenue could not support the company's debt and working capital needs. The company defaulted on its credit facility late last year. 

The company has determined that a sale of the remaining business is the best option for maximizing value to its stakeholders. What's that value, you ask? $1.7 million in cash, a credit bid against the DIP credit facility of no less than $4 million (which is the full principal amount of the DIP), and $14 million in new second lien notes. 

  • Jurisdiction: D. of Delaware 
  • Capital Structure: $37.9mm secured 1st lien term loan (CIT Bank), $29.6mm secured 2nd lien term loan (DV, an affiliate of Levine Leichtman Capital Partners), $42.9mm secured holdco first lien term loan (DV)  
  • Company Professionals:
    • Legal: Landis Rath & Cobb LLP (Adam Landis, Kerri Mumford, Kimberly Brown, Jennifer Cree) & (special counsel) Schulte Roth & Zabel LLP (Adam Harris) 
    • Investment Banker: Imperial Capital LLC
    • Real Estate Advisor: Hilco Real Estate LLC
    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Stalking Horse Bidder: Right Lane Dough Acquisition, LLC
      • Legal: McDonald Hopkins LLC (David Agay)
    • 1st Lien Agent: CIT Bank
      • Legal: Holland & Knight LLP (Brent McIlwain) & (local) Young Conaway Stargatt & Taylor LLP (Robert Brady)

New Chapter 11 Filing - Ignite Restaurant Group

Ignite Restaurant Group

  • 6/6/17 Recap: Publicly-traded ($IRG) Houston-based owner of 112 Joe's Crab Shack locations and 25 Brick House Tavern + Tap locations filed for bankruptcy because people can't tear their eyes off of whatever mobile device they're towing around long enough to sit at a casual dining spot. "The market for casual dining has been deteriorating for some time." No kidding, dudes. That said, someone clearly still believes in the space as the company has lined up a stalking horse bidder to purchase the company in bankruptcy for $50mm and some assumed liabilities (subject to deductions/increases). That "someone" is KRG Acquisitions Co LLC, an affiliate of Kelly Investment Group. Maybe it's the "'I'm relaxed' restaurant experience" that the buyer finds compelling...? (Serious question: is weed legal in Texas yet?). Anyway, good luck with that. 
  • Jurisdiction: S.D. of Texas
  • Capital Structure: $30mm RCF & $165mm TL (Credit Suisse AG)     
  • Company Professionals:
    • Legal: King & Spalding LLP (Sarah Borders, Jeffrey Dutson, Edward Ripley, Elizabeth Dechant)
    • Financial Advisor: Alvarez & Marsal LLC (John Tibus)
    • Investment Banker: Piper Jaffray & Co. (Richard Shinder, Teri Stratton)
    • Real Estate Advisor: Hilco Real Estate LLC 
    • Claims Agent: Garden City Group LLC (*click on company name above for the free docket)
    • Other Parties in Interest:
      • Credit Suisse AG
        • Legal: Latham & Watkins LLP (Keith Simon, David Hammerman, Hugh Murtagh) & (local) Porter Hedges LLP (John Higgins)
      • KRG Acquisition Co LLC 
        • Legal: Goldberg Kohn Ltd. (Randall Klein, Prisca Kim) & (local) Okin Adams LLP (Matthew Okin, Ryan O'Connor)
      • Official Committee of Unsecured Creditors
        • Legal: Pachulski Stang Ziehl & Jones LLP (Jeffrey Pomerantz, Bradford Sandler) & (local) Cole Schotz PC (Michael Warner)
      • Potential Buyer: Landry's Inc.
        • Legal: Haynes and Boone LLP (Patrick Hughes, Arsalan Muhammad, Jonathan Pressment, Sarah Jacobson)

Updated 7/17/17 11:23 am CT