Law360 (July 30, 2020, 11:08 AM EDT) -- California Pizza Kitchen entered Chapter 11 in the Southern District of Texas with a deal to slash about $230 million in debt and explore a possible sale, saying the pandemic had made its finances unsustainable.
California Pizza Kitchen and seven affiliates filed petitions late Wednesday with up to $500 million in assets and between $500 million and $1 billion in liabilities. The restauranteur said it has inked a restructuring deal with the holders of roughly all its priority first lien term loan and the holders of about 78% of its first lien term loan. The deal would provide nearly $47 million in additional financing and slash about $230 million in debt.
That deal does not yet have the support of its second lien lenders, the court filing noted.
CPK said that the COVID-19 pandemic has strained its business. The restaurant chain has over 200 locations worldwide and prior to the pandemic, brought in 78% of its total sales from in-store dining and sales, the filing said.
"No restauranteur in the world … has been unaffected by the COVID-19 pandemic," the filing said. "CPK's balance sheet and lease footprint are simply not manageable."
The company obtained $30 million in financing early in the pandemic, but it has only $13.5 million in cash on hand and about four months of unpaid rent at most of its locations, the filing said. The unpaid rent has resulted in default notices from landlords and in some instances, court actions, CPK said.
CPK said it hopes to move through the Chapter 11 process in fewer than 85 days.
"CPK will use this time to generate as much consensus as possible with the rest of its capital structure, negotiate with lessors to rationalize its lease footprint, and prepare for emergence as a healthier company positioned for long-term success," the filing said.
CPK also requested court approval of bidding procedures for a potential sale that would proceed alongside the Chapter 11 plan.
The company said it had been exploring a sale prior to the pandemic, but the outbreak and accompanying restrictions forced it to put the process on hold. CPK said it had already been grappling with the rise of fast-casual dining; decreased foot traffic around the malls and other CPK locations; and the increase of third-party food delivery services.
While the company worked to cut costs and streamline its menu, it still faced a cash crunch in 2018 and 2019 and anticipated future hurdles to its business strategy, the filing said. The pandemic exacerbated its financial situation, making a Chapter 11 petition and restructuring plan the company's best path forward, according to the filing.
"The restructuring support agreement and [Chapter 11] plan present the only viable path forward that results in CPK's business continuing as a going concern," the filing said.
CPK is one of numerous restaurant chains to seek Chapter 11 protection amid the pandemic, including West Coast sushi chain Sustainable Restaurant Holdings, which filed for Chapter 11 in May; baker chain Le Pain Quotidien; Florida restaurant chain TooJay's Deli; and FoodFirst Global Restaurants Inc., which owns Italian eatery chains Brio Italian Mediterranean and Bravo Fresh Italian.
Ted Gavin, managing director and founding partner of bankruptcy consulting firm Gavin/Solmonese LLC, said the pandemic has undercut the business model of retailers and restaurant chains such as CPK that rely heavily on foot traffic.
"You get COVID-19 and social distancing and changes in how people get food … it has not been kind to retailers," he told Law360 on Friday.
In the long run, eateries entering Chapter 11 now will need to make major changes to their businesses in order to stave off another bankruptcy filing a few years down the road, Gavin said.
"If you're just restructuring to move your debt around …. but not using the opportunity to fundamentally change your business, you might as well be rearranging deck chairs on the Titanic," he said. "It's got to be a much more holistic approach, a much more ground-up approach."
Representatives for CPK declined to comment beyond the company's announcement.
California Pizza Kitchen is represented by Joshua A. Sussberg, Matthew Fagen and Francis Petrie of Kirkland & Ellis LLP and by Matthew D. Cavenaugh, Jennifer F. Wertz, Veronica A. Polnick and Kristhy M. Peguero of Jackson Walker LP.
The case is In re: California Pizza Kitchen Inc., case number 20-33752, in the U.S. Bankruptcy Court for the Southern District of Texas.
--Additional reporting by Rick Archer, Bill Wichert, Carolina Bolado and Vince Sullivan. Editing by Alyssa Miller.
Update: This story has been updated with more details from the company's filing and with comment from Ted Gavin.
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