Restaurants Unlimited on the Bankruptcy Auction Block

Seattle-based Restaurants Unlimited, Inc., operator of 35 restaurants across six states, has filed for Chapter 11 bankruptcy protection in Delaware along with three affiliates. The Bankruptcy Court has scheduled a “first-day” hearing to take place today, July 9th, at 3:00 p.m. The hearing agenda is available here.

Update: The committee formation meeting has been set for July 23rd at 10:00 a.m. at 405 King Street, 2nd Floor Wilmington, Delaware. It promises to be a lovely, muggy, summer day with highs in the 90s and a chance of thunderstorms. I apologize. Seek out air conditioning.

Company Background

Restaurants Unlimited, an eatery chain owned by private-equity firm Sun Capital Partners, Inc, offers both fine dining and polished casual dining in “iconic” locations under the following local brands: 

  • Clinkerdagger
  • Cutters Crabhouse
  • Fondi Pizzeria
  • Henry’s Tavern
  • Kincaid’s
  • Maggie Bluffs
  • Manzana
  • Newport Seafood Grill
  • Palisade
  • Palomino
  • Portland City Grill
  • Portland Seafood Company
  • Scott’s Bar & Grill
  • Simon & Seafort’s
  • Skate’s on the Bay
  • Stanford’s
  • Stanley & Seafort

What Went Wrong?

The filing is the most recent in a spate of restaurant bankruptcies as consumers take advantage of falling grocery prices while restaurants grapple with increasing operating costs and market saturation. In particular, Restaurants Unlimited attributes its filing to steep minimum wage hikes across the Pacific coast—with additional hikes projected for 2020—and the national trend away from casual dining. The company’s unsuccessful, $10 million expansion into two new locations exacerbated these problems. The resulting liquidity crisis saw the company falling behind on rent obligations and vendor payments, defaulting on $40 million in secured debt, and shuttering six locations.

Other recent restaurant filings include Real-Mex, Pappa Ginos, Bertucci, Rock & Brews, Palm Restaurants, Garces Restaurant Group, Joe’s Tavern Brick House, and Taco Bueno.

On the Auction Block

Restaurants Unlimited commenced its bankruptcy case to sell its business through an auction process. The company’s prepetition lenders, Drawbridge Special Opportunities Fund and NXT Capital, and their agent, Fortress Credit Co., are providing $10 million in post-petition financing to support these efforts. In fact, the company first engaged an investment banker to locate to a buyer or secure new financing in 2016. Those efforts failed, and in spring 2019, Restaurants Unlimited hired Configure Partners to run a bankruptcy sale process. Will it have any better luck this time? Although the company does not have a purchase offer in hand, it reportedly has received some initial indications of interest and is “optimistic.”

Financing: At a Price

While post-petition financing will provide the company with much needed liquidity, it comes at a steep price. The financing comes in the form of a senior secured, super-priority, multi-draw term loan with $3.25 to be drawn on an interim basis before final court approval. While there is no roll-up of prepetition debt, the facility includes a 5% closing fee, a 2% commitment fee, and various other fees, as well as a proposed lien on avoidance actions (which would otherwise be available to pay unsecured creditors) and waiver of the debtor’s surcharge rights and the “equities of the case” exception under Bankruptcy Code section 552(b).

The financing is subject to the following proposed milestones, all of which are designed to culminate in a sale by the end of September–despite the fact that the company has not yet located a buyer.

  • July 10: Entry of interim DIP order
  • Aug. 20: Obtain stalking horse bid
  • Aug. 21: Entry of bid procedures order
  • Sept. 13: Bid deadline
  • Sept. 17: Auction
  • Sept. 20: Entry of sale order
  • Sept. 26: Sale consummation

The lien challenge deadline is the earlier of 60 days after selection of counsel to a creditor’s committee or75 days after the petition date. The investigation budget is $25,000.

Critical Vendors

Meanwhile, Restaurants Unlimited is seeking authority to pay up to $3.5 million in “critical vendor” claims consisting of amounts owed to logistics providers, PACA/PASA claimants and an estimated $1.3 million in 503(b)(9) claimants. An initial $500,000 could be paid if approved on an interim basis. Restaurants Unlimited estimates that it owes roughly $8 million to trade vendors, landlords and other unsecured creditors. Of that amount, approximately $4.1 million is owed to its 10 largest unsecured creditors:

Sysco$1.830,000
Pacific Seafood Co.$930,000
Charlies Produce Company$471,000
Microsoft Leasing$180,000
Aramark$160,000
Newport Meat$120,000
LA Specialty Produce Co. d/b/a SF Specialty$120,000
Retail Properties of America$104,000
Baseball Club of Seattle, d/b/a Seattle Mariners$100,000
Attilio Merlino & Assoc., Inc., d/b/a/ Merlino Foods$100,000

Additional Information

Additional information is available free of charge here.

Mette K.

Kitten Heels are Dead. Long Live Kitten Heels.

The retailpocolypose is continuing at full speed, impacting retailers both here in the US and across the pond. Clothing retailer LK Bennett Ltd. is the latest High Street casualty, closing five stores and going into administration in the UK. It is joined by its New York-based subsidiary, L.K. Bennett U.S.A., which has filed for chapter 11 protection in the Delaware Bankruptcy Court.

Company Background

Opening in London in 1990 to bring “a bit of Bond Street luxury to High Street,” LK Bennett quickly established itself as an upmarket retailer. And its founder, Ms Bennett, just as quickly established herself as “the Queen of the Kitten Heel.” Bennett’s “smart” dayware is a favorite of Princess Kate Middleton and other celebrities. And even Prime Minister Theresa May has been knows to step out in LK Bennett kitten heels.

Faltering Steps

Corporate missteps and a challenging retail environment have led to declining sales and, ultimately, bankruptcy.  Many of the elements of the LK Bennett story are all too familiar.

  • The UK clothing and footwear sector are suffering from price deflation, leaving LK Bennett priced beyond the reach of most shoppers.
  • Today’s retail environment is all about authenticity and distinctiveness; LK Bennett has failed to embrace a sense of uniqueness and creativity that would set it apart from more competitively priced competitors in a saturated market.
  • An excessive number of stores at above-market rates – exacerbated by decreasing foot traffic and overdependence on sales at brick & mortar locations – has left the company struggling with excessive lease costs.
  • LK Bennett has also failed to connect with its young consumers via social media and has been overtaken by younger, more-affordable and digitally-savvier brands. (Sorry, Prime Minister.)
  • Ownership changes have left strategies in flux without time to take root and come to fruition.

And by the way…. is an “affordable luxury brand” even a thing?  Are consumers who are willing to invest in a luxury pair of shoes more likely to go all in and aim for a recognized high-fashion shoe brand, such as Jimmy Choo? 

What Comes Next for LK Bennett?

Interested buyers have been actively pursuing the company, at least in the UK. Similarly to (much, much) edgier UK lingerie brand and retailer Agent Provocateur, LK Bennet’s counterpart bankruptcy filing for its US subsidiary has likewise been teed up to pursue a sale.

Case Information

L.K. Bennett U.S.A. is represented by DLA Piper as counsel and Ernst & Young as restructuring advisor. The case number is 19-10760. The case has been assigned to Judge Kevin Gross.

Mette H. Kurth

Z Gallerie Suffers Self-Inflicted Wounds, Files Chapter 22 Bankruptcy Case

Z Gallerie, LLC, a CA-based home furnishing and décor retailer with 76 stores nationwide, has filed for Chapter “22” protection in Delaware.

Committee Formation Meeting

The Committee formation meeting is set for Wednesday, March 20, 2019 at 10:00 a.m. at the Doubletree Hotel in Wilmington, DE. Be prepared for a high of 50, a low of 34, and scattered showers. (Not that the weather in LA will be much better…. a high of 66 and more showers).

How Did It Get Here?

Founded in 1979, Z Gallerie filed its first Chapter 11 case in 2009 in the aftermath of the Great Recession.  At that time the original founders, the Zieden siblings, reacquired the company.  In 2014, the Ziedens sold majority control of the company to its current owner, Brentwood Associates, in a $110 million leveraged buyout.  Subsequently, the company’s performance declined significantly, bringing it to where we are today.

Z Gallerie is one of several recent furniture retailers to seek bankruptcy protection, including retailer The Robert Allen Group and Heritage Home Group. But unlike other retailers, Z Gallerie did not fall victim to the “retailpocolypse” but to self-inflicted wounds. The good news? Management is confident that it has addressed its operational missteps and is well on the way to turning the company around. Among the issues?

  • A steep decline in revenues after the Brentwood acquisition.
  • Leverage and liquidity issues.
  • A failed expansion strategy.
  • Delay in launching an e-commerce platform.
  • The failed launch of a new distribution facility.
  • The loss of a major supplier.

In 2018, the company generated more than $200 million in sales.  But at the time of the filing, it had less than $2 million in cash on hand.  Running out of adequate cash to fund operations, Z Gallerie approached its prepetition lenders for additional liquidity but could not secure operating funds outside of a Chapter 11 process.


Imagining the future…. “Speed and cooperation” will determine whether Z Gallerie survives.

Where Is It Headed?

The Plan and Sale Process

Z Gallerie has secured $28 million in DIP financing commitments, conditioned on the company moving rapidly through the bankruptcy process.  To that end, Z Gallerie has already filed a “toggle plan” providing for either the marketing and sale of the company or a debt for equity swap “on terms to be determined.” The proposed timeframe is roughly as follows:

  • March 25: File disclosure statement.
  • April 12: Enter final DIP financing order, bid procedures order
  • April 19: Term sheets due from potential buyers.
  • May 7: If indications of interest are insufficient to pay off lenders, provide evidence of exit financing or execute a business plan that significantly reduces debt by aggressively shuttering stores.
  • May 7: Order approving disclosure statement.
  • May 16: Bid deadline.
  • May 20: Auction for substantially all assets.
  • May 29: Finalize asset purchase agreement.
  • June 17: Enter order confirming plan or approving sale.

The plan, however, is essentially a placeholder with significant gaps to be filled in. For example, treatment of critical trade claims and general unsecured claims is “to come.”

Store Closings

Meanwhile, the company is seeking to close up to 17 stores and requesting approval of streamlined procedures to conduct store closing sales.  It anticipates 59 go-forward locations (55 stores, two outlets, and two distribution centers).

The First Day Hearing

Z Gallerie’s financing, and other first-day relief, was approved at the first day hearing held today, Tuesday, March 12, at 3:30 p.m.

Mette K.

Promise Healthcare Files For Bankruptcy, Promises Improved Financial Health

Promise Healthcare Group and numerous affiliates filed for Chapter 11 protection Sunday night in Delaware.

What Ails Promise Healthcare?

Promise Healthcare is a Florida-based specialty post-acute care healthcare provider operating several hospitals and skilled nursing facilities across nine states. It operates two short-term acute care hospitals, 14 long-term acute care hospitals and two skilled nursing facilities. According to the company, Promise Healthcare is one of the largest long-term acute care hospital operators in the U.S.

“While I believe that the Debtors’ overall business is fundamentally strong, [Promise Healthcare has] been operating with an unsustainable balance sheet due to current industry dynamics and certain underperforming facilities within [its] portfolio.”  – Andrew Hinkelman, FTI Consulting, Chief Financial Officer

Like many hospital operators that have filed chapter 11 recently, such as ManorCare Health Services, Promise Healthcare has suffered from significant reductions in reimbursement rates from The Centers for Medicare & Medicaid Services. Average reimbursement rates for non-qualifying patients have dropped roughly $41,000 per stay industry wide. Coupled with Promise’s inability to adjust operating cost structures, this has directly impacted profitability.

What Are the Next Steps on the Road to Recovery?

Step 1: Sell Non-Core Assets.

Promise Healthcare has already received  purchase offers for several non-core assets.  Offers in hand, it hopes to complete sales and use the proceeds to pay down secured loans over the next three months.

  • The Silver Lake Facility:  L.A. Downtown Medical Center has offered to purchase Promise Healthcare’s Silver Lake facility section for $84.15 million. The offer will be subjected to overbids in a bankruptcy auction.  A sale closing is planned for January or February of 2019.
  • The St. Alexius Facility: Promise Healthcare has been looking for a buyer for its facility in St. Louis for the past year-and-a-half to two years. However, it has been hindered by the termination of its Medicare program in November, the need for substantial capital improvements, and heavy operating losses.  Despite these challenges, Promise Healthcare is negotiating a stock sale which it hopes to conclude by year end.
  • San Diego Property: Promise Healthcare is also in final negotiations to sell its San Diego property.  It hopes to conclude this sale as well by year end.

Step 2: Obtain Postpetition Financing.

Promise Healthcare has requested $85 million in postpetition financing, including a rollup of its $65 million prepetition asset-based revolving loan facility and a new money commitment of $20 million, with prepetition revolving lender Wells Fargo Bank as agent.

Step 3: Come Up With an Exit Strategy.

Over the next 6 months, Promise Healthcare will search for an exit. That could be a buyer for the business. Or an equity sponsor who will support a reorganization.  Houlihan has already contacted 77 financial and strategic partners and received “several” indications of interest. Ultimately, Promise Healthcare hopes to file a bid procedures motion by the end of the year, with the intention of closing a sale around April 2019.

Prime Clerk is the claims agent. Additional information about the case is available here.

Mette K.

 

 

Papa Gino’s & D’Angelo Enter Bankruptcy

PGHC Holdings, operator of New England-based Papa Gino’s and D’Angelo, filed for chapter 11 protection on Monday.  Not surprisingly, the case is pending in Delaware.

Reasons for the Bankruptcy? Same Old/Same Old

Also not surprising, the bankruptcy follows performance struggles faced by both Papa Gino’s and D’Angelo as a result of:

  • Evolving consumer dining preferences;
  • Increased labor costs; and
  • Increasing competition among national chains.

Remember Real Mex, for example? Or Bertucci’s? Restaurant growth is continuing to slim down, folks….

In addition to operational factors, Papa Gino’s and D’Angelo have a substantial debt load that they have been unable to service. This includes: $18.5 million in first-lien, secured debt; $34.2 million in second-lien, secured debt; $39.9 million in unsecured mezzanine debt; and $9 million in unsecured trade debt, lease obligations and repair obligations. And Pappa Ginos and D’Angelo are in default under both the first and second lien agreements while the 16% senior subordinated notes matured last June. Ouch.

What Happens to Papa Gino’s and D’Angelo’s Next?

Although Papa Gino’s may be a “New England original,” its bankruptcy plans are not.

The company intends to close roughly 92 locations (47 Papa Gino’s / 45 D’Angelo). In addition, they have secured a $13.8 million in post-petition financing from an existing, secured lender to keep the company afloat. And a credit bid by the lender’s designee, a Wynnchurch Capital portfolio company, serves as the “stalking horse,” opening offer to purchase both the Papa Gino’s and D’Angelo restaurants. The stalking horse credit bid is $20 million plus assumption of certain liabilities.  Ultimately, a bankruptcy auction will determine the highest and best bidder.

The sale timeline is:

  • Bid procedures shall be established by December 17, 2018;
  • The auction is to be held by January 28, 2019;
  • A hearing on the sale shall be held and sale order entered by January 31, 2019; and
  • The sale closing shall take place by January 31, 2019.

Papa Gino's

Papa Gino’s and D’Angelo have issued a press release. The proposed sale transaction, they say, will significantly strengthen their financial resources. This will allow the restaurants to remodel and modernize across MassachusettsNew HampshireRhode Island, and Connecticut. They also plan to open additional restaurants throughout New England.

Hungry? Look forward to enhanced on-line ordering capability as well.

Mette K.