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Tough Week For PE-Backed Pizza Shops
MidOcean's Sbarro and Centre Partners' Uno recently hit with downgrades.
August 18, 2008
Are private equity-backed pizza chains going to be the next restaurant segment heading towards restructuring activity?
If the recent downgrades of Sbarro and Uno Restaurant Holdings, portfolio companies of private equity firms MidOcean Partners and Centre Partners Management, respectively, offer any clues, things look less than appetizing.
The corporate rating of Sbarro, the Melville, N.Y.-based pizza chain owned by MidOcean, was downgraded to 'CCC+' from 'B-' by Standard & Poor’s last week based on the possibility that the company will breach the financial covenants of its senior secured credit facilities because of poor operating performance, as well as Ebitda erosion, according to Mariola Borysiak, a credit analyst at Standard & Poor’s. “Pro forma for the change in the covenant level, Sbarro would be out of compliance," Borysiak said.
In an interview with IDD, Borysiak said: “Sbarro is located mostly in malls, and the economy really hurts customers. [Customer] traffic has been declining, while higher commodity and labor costs are squeezing margins,” she says.
S&P also assigned a negative outlook to Sbarro, which has a $25 million revolving facility and $183 million first-lien term loan; an existing rate on both of the credit pieces was lowered to 'B-' from 'B+'. And, S&P rated $150 million of senior notes a 'CCC-' after previously being rated 'CCC+'.
Pizza sellers, as well as bakeries and restaurants that rely on flour, have been hard hit by commodity price increases. Increasing costs have pushed the consumer price index higher for months and in July it increased 0.5%.
MidOcean Partners acquired Sbarro for $450 million in January 2007, and Centre Partners purchased Uno Restaurant in January 2005 for an undisclosed sum.
According to Borysiak, Sbarro is carrying debt-to-adjusted Ebitda of about 8.9 times, making it “highly leveraged” and marking an increase from the 8.2 times debt to adjusted Ebitda from a year ago. The credit rating agency analyst noted that S&P’s adjusted Ebitda takes into account the company’s operating leases rather than just the standard cash flow figure. Sbarro is carrying about $78 million in trailing 12-month adjusted Ebitda, according to the analyst.
Separately, Moody’s Investors Service downgraded Uno Restaurant this past week to Ca from Caa2 and assigned it a negative outlook on the basis of an elevated probability of default. The company, which has decided not to make its next interest payment on $142 million in senior secured bonds, has hired Houlihan Lokey to explore strategic alternatives that could include a recapitalization.
Uno Restaurant has very high leverage relative to its cash flow generation, according to Moody’s.
The company generated $317 million in trailing 12-month revenue through June 29, from its more than 200 pizzeria restaurants that under the Uno Chicago Grill chain, primarily in the New England and Mid-Atlantic regions, Moody’s said.
A number of restaurant chains have landed in bankruptcy this year including Buffets Holdings, a portfolio company of New York private equity firm CI Capital Partners. Mrs. Fields Famous Brands filed Chapter 11 and S&A Restaurant Group, which runs the Bennigan’s and Steak & Ale chains, filed for Chapter 7.
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