July 6, 2019 − RUI Holding Corp. (d/b/a Restaurants Unlimited) and three affiliated Debtors ("RUI" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11509. The Debtors, a premier multi-branded restaurant operator with restaurants in 12 states, are owned by an affiliate of private equity firm Sun Capital and are represented by Domenic E. Pacitti of Klehr Harrison Harvey Branzburg LLP. Further board-authorized engagements include (i) Configure Partners, LLC as investment banker, (ii) Carl Marks Advisory Group LLc as restructuring advisor and (iii) Epiq Bankruptcy Solutions, Inc. as claims agent.
The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets of between $50.0mn and $100.0mn; and estimated liabilities of between $50.0mn and $100.0mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Pacific Seafood Co. of Washington ($935k trade debt), (ii) Sysco Food Services Portland ($707k trade debt) and (iii) Sysco Seattle ($606k trade debt). Three of the top five unsecured creditors, and six of the top 15, are Sysco affiliates; this in respect of Debtors who's competitive advantages include "freshly prepared made-from-scratch food and cocktails using original recipes, signature sauces and dressings" [Docket No. 2].
Objectives of the Chapter 11 Filing
The Debtors are looking to sell; an effort which began in earnest as early as the fall of 2016 with the engagement of investment bankers. The Bagley Declaration (defined below) states: "Notwithstanding the Debtors’ almost constant efforts and management attention devoted to several processes over the last three years to seek to locate either a party to provide an equity infusion to offset amounts owed to the Prepetition Lenders or to locate a purchaser for some or all of the assets of the Debtors, the Debtors were unable to consummate a transaction."
Undeterred, the Debtors are hoping that once pared down of debt; they may be more attractive to potential purchasers. They may be right. The Bagley Declaration continues, "The Company commenced these chapter 11 cases to preserve value for its stakeholders, including its employees and creditors. Additionally, the Debtors have negotiated a debtor-in-possession financing facility that will allow the Debtors to continue to operate in the normal course, pay landlords and vendors, and have sufficient liquidity to pay the administrative costs, both operational and statutory, required in these chapter 11 cases.
After its engagement, Configure prepared a marketing teaser and confidential information memorandum that it used to market the sale of the Debtors’ assets. As of the Petition Date, Configure and/or the Debtors contacted approximately 69 potential strategic buyers and 213 financial buyers, out of which 45 executed confidentiality agreements and received the confidential information memorandum and access to key documents in an online data room. To date, Debtors have received initial indications interest from multiple strategic and financial buyers."
Prepetition Capital Structure
Debtors RU Corp., Restaurants Unlimited Inc., and Restaurants Unlimited Texas Inc. are parties to a Third Amended and Restated Credit Agreement, dated as of July 31, 2013 (the “Prepetition Credit Agreement”) with Fortress Credit Co LLC, as agent. Prior to the Petition date, the Debtors were in default under the Prepetition Credit Agreement which led to a series of forbearance agreements beginning in 2018 the latest of which was dated as of March 1, 2019.
As of July 31, 2018, there was no other financing available to the Debtors and the Debtors have operated solely based on their cash flow from operations through the Petition date. As of the Petition date, approximately $37.7mn (plus accrued and unpaid interest of $1.7mn) is outstanding under the Prepetition Credit Agreement.
As of the Petition date, the Company also owes various vendors, suppliers, and other unsecured trade creditors approximately $7.6mn.
The Debtors were acquired by an affiliate of Sun Capital (recently of Shopko Chapter 11 fame) in 2007.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Bagley Declaration”), David Bagley, the Debtors' Chief Restructuring Officer, detailed the events leading to RUI’s Chapter 11 filing. The most important factor appears to be "progressive wage laws" which pushed up the Debtors' annual wage costs by $10.6mn. The math is both simple and brutal: $10.6mn divided by 1,885 part-time hourly employees equals $5,623 per part-time employee. This at a business with 2018 revenues ($176.0mn) down 1% from the prior year. The second significant factor cited by Bagley, is an ill-advised decision to open two new restaurants in the second half of 2017 at a cost of $10.0mn. Not only did this decision to spend a discretionary $10.0mn occur after the Debtors were otherwise (i) in default in respect of the Prepetition Credit Agreement and (ii) already reeling from changes to minimum wage laws; these two new restaurants "experienced significant operating losses" from the outset. The Debtors have now been forced to close 6 unprofitable restaurants.
The Bagley Declaration states: "Over the past several years, certain changes to wage laws in the Debtors’ primary geographic locations coupled with two expansion decisions that utilized cash flow from operations resulted in increased use of cash flow from operations and borrowings and restricted liquidity. These challenges coupled with additional state-mandates that will result in an additional extraordinary wage hike in FYE 2020 in certain locations before all further wage increases are subject to increases in the CPI and the general national trend away from casual dining, led to the need to commence these chapter 11 cases.
Over the past three years, the Company’s profitability has been significantly impacted by progressive wage laws along the Pacific coast that have increased the minimum wage as follows: Seattle $9.47 to $16.00 (69%), San Francisco $11.05 to $15.59 (41%), Portland $9.25 to $12.50 (35%). As a large employer in the Seattle metro market, for instance, the Company was one of the first in the market to be forced to institute wage hikes. Currently in Seattle, smaller employers enjoy a statutory advantage of a lesser minimum wage of $1 or more through 2021, which is not available to the Company. The result of these cumulative increases was to increase the Company’s annual wage expenses by an aggregate of $10.6 million through fiscal year end 2019.
In the second half of 2017, the Debtors opened two new restaurants, one in Bellevue, WA and the second in Seattle, WA. This expansion required a significant amount of capital, exceeding $10 million. Since opening, the anticipated foot traffic and projected sales at these locations did not materialize and, exacerbated by the increase in employee costs, the Company experienced significant operating losses at these locations.
About the Debtors
Founded in 1968, the Company opened its first restaurant in 1969 and has been a premier multi-branded restaurant operator for almost 50 years, with locations primarily along the West coast and specific concentration in the Pacific Northwest. The Company’s restaurants are situated in iconic, scenic, high-traffic locations. The Debtors currently own and operate 35 restaurants that offer both fine dining at various upscale locations and polished casual dining restaurants in 6 states, under the following trade names: Clinkerdagger; Cutters Crabhouse; Fondi Pizzeria; Henry’s Tavern; Horatio’s; 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; and Stanley & Seafort’s.
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