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California Pizza Kitchen, Inc. – Citing Competitive Challenges and COVID-19, “Polished Casual” Restaurant Group Files Chapter 11 with $403mn of Funded Debt, Terms of RSA Will See $230mn Come Off Balance Sheet as First Lien Lenders Swap Debt for Equity

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July 29, 2020 – California Pizza Kitchen, Inc. and seven affiliated Debtors (“CPK” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-33752 (Judge Isgur). The Debtors, a restaurant chain serving "creative California cuisine in over 200 restaurants in 8 countries and U.S. territories," are represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii)  Alvarez & Marsal North America, LLC as restructuring advisors, (iii) Guggenheim Securities, LLC as investment banker ("Guggenheim"), (iv) Hilco Real Estate, LLC as real estate advisor and (v) Prime Clerk as claims agent. 

The Debtors are owned by private equity firm Golden Gate Capital which acquired CPK in 2011 for $470.0mn (cash).

The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn (funded debt of $403.1mn). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Simon Property Group, Inc ($2.9mn rent claim), (ii) Sysco Corporation ($2.8mn trade claim) and (iii) Brookfield Asset Management ($2.7mn rent claim).

In a press release announcing the filing, CPK advised that: “it has entered into a restructuring support agreement with its first lien lenders (the 'Agreement) that will equitize the vast majority of CPK’s long term debt.…This pre-negotiated filing represents a deal with CPK’s lenders and will allow the California-based restaurant the ability to close unprofitable locations, reduce its long-term debt load, and quickly emerge from bankruptcy as a much stronger company. CPK aims to complete the Chapter 11 process in under three months.“

The Debtors’ CEO Jim Hyatt, commented: “The unprecedented impact of COVID-19 on our operations certainly created additional challenges, but this agreement from our lenders demonstrates their commitment to CPK’s viability as an ongoing business. Throughout this process we will continue to deliver the same innovative, California-inspired cuisine that we have been serving for over 35 years.” 

Overview of Plan and Restructuring Support Agreement

CPK has executed a July 29th restructuring support agreement (the "RSA") with holders of approximately 100% of CPK’s priority first lien term loan and approximately 78% of CPK’s first lien term loan on the terms of a restructuring transaction that will provide the Company with access to $46.9 million of additional financing pursuant to the DIP Facility and a reduction of approximately $230.0mn of outstanding prepetition debt. The RSA (and DIP documentation) also require the Debtors to meet milestones including: confirmation of a plan within 70 days of the Petition date and emergence from chapter 11 within 85 days of the Petition date.

The Disclosure Statement provides: "On July 29, 2020, certain Holders of First Lien Secured Claims and Priority First Lien Claims (the “Consenting Lenders”), certain Holders of the Debtors’ Existing Equity Interests (the “Consenting Sponsors”, and collectively with the Consenting Lenders, the “Consenting Stakeholders”), and the Debtors entered into a restructuring support agreement (together with all exhibits thereto, and as amended, restated, and supplemented from time to time, the “Restructuring Support Agreement” [attached as Exhibit C to Docket No. 5])… that sets forth the principal terms of a restructuring of the Debtors. 

Through the Plan, the Debtors will consummate one of two alternatives to maximize the value of the estate….an equitizing transaction that will significantly reduce their debt obligations, provide sources of financing, and position them for future success…[or]…the Alternative Transaction whereby the Debtors would sell all, or substantially all, of their assets.

The key financial components and commitments of the Restructuring Transactions are as follows. On the Effective Date:

  • all Administrative Claims, Priority Tax Claims, and Other Secured Claims will be paid in full in Cash or receive such other treatment that renders such Claims Unimpaired;
  • each Holder of an Allowed DIP Facility Claim shall receive its allocated share of the New First Lien Term Loan Exit Facility; 
  • each Holder of an Allowed First Lien Secured Claim shall receive its Pro Rata share of and interest in, as applicable, (i) 100% of the New Common Stock (subject to dilution by the Management Incentive Plan and the New Money DIP Fee); (ii) the participation in the New First Lien Exit L/C Facility; and (iii) the New Second Lien Term Loan Exit Facility;
  • the Debtors shall obtain the Exit Facilities; and
  • the parties to the Restructuring Support Agreement will grant full, mutual releases, subject to revocation as set forth in the Restructuring Support Agreement….In parallel with the Restructuring Transactions, the Plan and Disclosure Statement contemplate a sale and marketing process to solicit bids for a sale transaction of all or substantially all of the Debtors’ assets in accordance with the terms and conditions of the Restructuring Support Agreement."

DIP and Exit Financing

The Debtors have arranged $107.7mn of debtor-in-possession ("DIP") financing to be provided by certain prepetition first lien lenders and which is comprised of (i) a $46.8mn new money senior secured credit facility and (ii) a $60.8mn roll-up of first lien loans. Upon emergence, the entirety of the DIP Facility (inclusive of the $60.8mn in rolled-up first lien loans) will convert to the "New First Lien Term Loan Exit Facility."

The following is a summary of classes, claims, voting rights and projected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement)

  • Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 3 (“First Lien Secured Claims”) is impaired and entitled to vote on the Plan. Each Holder of an Allowed First Lien Secured Claim shall receive: (i) with respect to any First Lien Credit Agreement L/C Claims, participation in the New First Lien Exit L/C Facility in an amount equal to such Holder’s First Lien Credit Agreement L/C Claims; and (ii) with respect to any First Lien Credit Agreement Claims, its Pro Rata Share of and/or interest in (A) 100% of the New Common Stock (subject to dilution by the Management Incentive Plan and the New Money DIP Fee); and (B) the New Second Lien Term Loan Exit Facility (in an aggregate amount of $50,000,000); or (iii) in the event of an Alternative Transaction, treatment consistent with section 1129(a)(7) of the Bankruptcy Code.
  • Class 4 (“Second Lien Claims”) is impaired and entitled to vote on the Plan. On the Effective Date, each Holder of an Allowed Second Lien Claim shall receive treatment consistent with section 1129(a)(7) of the Bankruptcy Code.
  • Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. On the Effective Date, each Holder of an Allowed General Unsecured Claim shall receive treatment consistent with section 1129(a)(7) of the Bankruptcy Code.
  • Class 6 (“Intercompany Claims”) unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
  • Class 7 (“Intercompany Interests”) unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
  • Class 8 (“Existing Equity Interests”) impaired, deemed to reject and not entitled to vote on the Plan.

Events Leading to the Chapter 11 Filing

The Disclosure Statement provides an unusually frank assessment of competition concerns without necessarily providing answers as to how they will (or can) be addressed. Notable amongst these concerns are that (i) fast food competitors have been able to encroach on their market "introducing speed and convenience without sacrificing quality, and often at a lower price point than a sit-down restaurant," (ii) Amazon/Netflix are reducing bricks and mortar foot traffic and leaving the Debtors with the unenviable task of "drawing people out of the comfort of their homes" and dealing with a drop in the number of impulse diners and (iii) the rise of delivery services has resulted in lower visibility and increased competition. The Debtors counter that "CPK [has] focused on a more value and speed-focused lunch menu to compete with fast-causal restaurants. CPK also worked to meet market trends and remain unique and competitive by leaning into its strengths, which include quality, innovation, and Cali-health offerings," but it is hard to see how these efforts are tackling the above concerns head on (or if the "polished casual restaurant space" has any real answers to a basketball short (or yoga pant) wearing potential client sitting in front of their TV with a smartphone in hand).

From the Disclosure Statement: "Since at least 2018, several macro-trends within the polished casual restaurant space have made competition for customers even more acute. These include:

  • The emergence and growth of fast-casual dining in the early 2000s. CPK generally does not find itself in competition with fast food restaurants, since CPK’s higher quality menu and traditional dining experience do not directly overlap with the strengths of a typical fast food restaurant. The growth of the larger brands in the fast casual dining space has changed the field, however, as restaurants such as Chipotle, Blaze Pizza, and Panerawere able to effectively introduce speed and convenience without sacrificing quality, and often at a lower price point than a sit-down restaurant. As a result, CPK had to adjust its approach to new customer expectations surrounding a swift and efficient dining experience. This competition from fast-casual chains is particularly focused with respect to lunch customers.
  • The “Amazon/Netflix” effect and changing consumer behavior. Because of the convenience provided by streaming companies and shopping websites, many consumers have begun to rely on these amenities for entertainment and personal shopping needs. As a general matter, this shift in behavior decreases foot traffic in and around malls and similar locations where CPK previously had access to customers. Accordingly, CPK now has to draw people out of the comfort of their homes and has lost a number of customers who would otherwise have dined at a CPK on impulse while out for other purposes.
  • The recent increase of third-party delivery services. Customers are making food purchases through mobile apps or third-party delivery-focused websites, which offer a quickly accessible, expansive set of choices. This dynamic has lowered barriers to entry and heightened visibility for restaurants that are not usually thought of as competitors for CPK. This increased competition for customers on these applications is even fiercer because CPK is now one of many options in what is usually a list format, making it challenging for CPK to utilize its branding, quality, or consistency to stand out among competitors who may be offering lower prices or quicker delivery. On an operational level, CPK had engaged in several initiatives over the past several years to increase efficiency in its locations, streamline its menu options, and reduce excess costs. CPK focused on a more value and speed-focused lunch menu to compete with fast-causal restaurants. CPK also worked to meet market trends and remain unique and competitive by leaning into its strengths, which include quality, innovation, and Cali-health offerings. 

Although CPK had consistent profit margins and brand recognition, CPK faced a liquidity crunch throughout 2018 and 2019.

Before the COVID-19 pandemic, CPK began a robust sale process, including outreach to 61 parties and a broad universe of relevant strategic and financial parties. 

However, the COVID-19 pandemic severely interrupted the marketing process… with on-premise dining (78% of its historical net sales) effectively wiped away due to dining room closures because of the COVID-19 pandemic, CPK’s liquidity needs persisted even in the face of the new money under the PTL Facility and CPK’s swift operational initiatives."

Store Closings and Lease Negotiations

In March 2020, CPK closed 46 restaurant locations where it was not feasible to remain open as off-premises-only, and instituted other operational changes including introducing CPK Market, reshuffling employees to maximize efficiency, and shifting focus to maximize off-premises-only dining. As part of this process, CPK engaged Hilco Real Estate, LLC to perform an analysis of CPK’s leased locations. Upon conclusion of the analysis, CPK and Hilco initiated discussions with CPK’s landlords to negotiate terms of the various existing leases. As of the Petition Date, CPK had successfully negotiated concessions totaling approximately $6.1mn over the next three years. The Debtors intend to continue negotiations with landlords during the pendency of these Chapter 11 cases. Due to their liquidity position, the Debtors have generally not paid rent since the onset of the COVID-19 pandemic."

Prepetition Indebtedness

As of the Petition date, CPK had approximately $403.1mn in aggregate principal amount of funded debt obligations. The Debtors’ prepetition funded debt obligations include approximately:

  • $60.8mn in principal amount and accrued interest outstanding under the Priority First Lien Credit Agreement, 
  • $254.8mn in principal amount outstanding under a first lien term loan facility and $12.5mn in principal amount outstanding under a $30.0mn first lien revolving credit facility, both of which are governed by the First Lien Credit Agreement,and 
  • $75.0mn in principal amount outstanding under the Second Lien Credit Agreement. 

Each of the Debtors is either a borrower or a guarantor under each of the Priority First Lien Credit Agreement, the First Lien Credit Agreement, and the Second Lien Credit Agreement. The obligations under the Priority First LienCredit Agreement and the First Lien Credit Agreement are secured by a first priority lien on substantially all of the assets of the Debtors. The obligations under the Second Lien Credit Agreement are secured by a second priority lien on substantially all of the assets of the Debtors

About the Debtors

According to the Debtors: "In 1985, California Pizza Kitchen (CPK) opened its first restaurant in Beverly Hills and introduced diners to innovative California-style pizza. With a passion for combining fresh, seasonal ingredients with flavor inspirations from around the world, today CPK is a global brand serving creative California cuisine in over 200 restaurants in 8 countries and U.S. territories. From signature, hand-tossed pizzas and high-quality main plates to inventive better-for-you options, Lunch Duos, premium wines and handcrafted beverages, CPK adds an imaginative twist to create a memorable dining experience. "

Corporate Structure Chart

 

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The post California Pizza Kitchen, Inc. – Citing Competitive Challenges and COVID-19, “Polished Casual” Restaurant Group Files Chapter 11 with $403mn of Funded Debt, Terms of RSA Will See $230mn Come Off Balance Sheet as First Lien Lenders Swap Debt for Equity appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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