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November 23, 2020 – The Debtors notified the Court that their Second Amended Plan of Reorganization had become effective as of November 23, 2020 [Docket No. 635]. The Court previously had confirmed the Debtors’ Plan on October 29, 2020 [Docket No. 600].
On 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). At filing, the Debtors, a restaurant chain serving “creative California cuisine in over 200 restaurants in 8 countries and U.S. territories,” noted estimated assets between $100.0mn and $500.0mn and estimated liabilities between $500.0mn and $1.0bn (funded debt of $403.1mn). In an amended Schedule E/F, the Debtors noted $113.2mn of assets and $451.6mn of liabilities [Docket No. 465].
The Debtors, were represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further board-authorized engagements included (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.
In a press release announcing the emergence, CPK stated: “As part of its financial restructuring, CPK completed a debt-for-equity transaction, and now has a substantially reduced debt load and increased liquidity, including exit financing that provides the capital to support CPK’s business and build on the company’s current business momentum. Upon emergence, the company eliminated more than $220 million of existing funded debt from its capital structure and now faces no near-term debt maturities. Substantially all of CPK’s equity is now held by CPK’s prepetition lenders.
CPK completed its restructuring with the full support of its creditors and previous equity holders.
Looking ahead, the company is focused on expanding its global franchise footprint; continuing its commitment to 'Cali Health' inspired menu innovation, such as the just-introduced plant-based BBQ 'Don’t Call Me Chicken' Pizza; investing more heavily in marketing and digital; and accelerating its recent off premise success during COVID.”
In an earlier press release announcing Plan confirmation, the Debtors had noted that "CPK will emerge with total debt of $177 million including additional exit financing."
The administrative claims bar date is set for January 7, 2021.
The Debtors' memorandum of law in support of Plan confirmation (the "Memorandum") [Docket No. 594] provided a pre-Plan confirmation hearing overview:, “The Debtors commenced these chapter 11 cases approximately three months ago, while firmly in the midst of an unprecedented global pandemic, with the goals of right-sizing their capital structure, reducing their lease footprint, and preserving thousands of jobs. For months, the Debtors worked to build consensus with stakeholders across their capital structure, which efforts led to the execution of the Restructuring Support Agreement with the Consenting Stakeholders, allowing the Debtors to enter chapter 11 contemplating a swift transaction that would provide the necessary liquidity to continue operations, market their assets, and, importantly, engage with all parties to build consensus around a plan of reorganization. Such negotiations were productive, and, prior to the hearing to approve the Disclosure Statement, the parties to the Restructuring Support Agreement entered into a Settlement with the Committee and certain Second Lien Lenders, building further consensus around the Plan. As a result, today the Debtors seek confirmation of a Plan that carries the widespread support of the Debtors’ stakeholders, and one that each Voting Class has overwhelmingly voted to accept.
The Plan before the court today proposes to deleverage the Debtors’ balance sheet by approximately $225 million and provide a meaningful recovery to the Debtors’ stakeholders, including general unsecured creditors. Further, the Plan contemplates a secured a fully committed DIP-to-exit facility that provides approximately $15 million of additional liquidity at emergence, which will allow the Company to achieve its long-term plans in the future. Confirmation of the Plan represents a significant milestone for the Debtors, particularly during these uncertain times. Today, the Debtors are on the verge of positioning their businesses to emerge from chapter 11 as a healthier, better-capitalized enterprise, equipped for go-forward success."
As to the prospect of outstanding objections interfering with a smooth confirmation hearing, the Memorandum added: "The only objections that the Debtors received relate to disputes regarding cure amounts listed on the Plan Supplement as well as certain other counterparty-specific issues related to contract assumption or rejection."
The Debtors' solicitation Disclosure Statement [Docket No. 434] adds: “On September 23, 2020, the Consenting Lenders, the official committee of unsecured creditors appointed in these Chapter 11 Cases (the 'Committee'), certain Holders of Second Lien Claims (the 'Certain Second Lien Claim Holders') and the Debtors entered into a settlement (the 'Settlement'), pursuant to that certain term sheet (the 'Settlement Agreement') filed with the Bankruptcy Court on September 23, 2020 [Docket No. 411], that sets forth a few additional terms of the restructuring of the Debtors, including that:
- each Holder of a Convenience General Unsecured Claim shall receive its Pro Rata share of a Convenience GUC Recovery; and
- each Holder of a non-Convenience General Unsecured Claim shall receive (i) its Pro Rata share of a GUC Cash Recovery (less any Stakeholder Reimbursements); and (ii) its Pro Rata share of a GUC Equity Recovery.
Pursuant to the Settlement, in the event of an Alternative Transaction, each Holder of a General Unsecured Claim shall receive its Pro Rata Share of the GUC Cash Recovery (less any Stakeholder Reimbursements) and an Additional Cash Payment.
The Restructuring Transactions under the Plan provide for the reorganization of the Debtors as a going concern with a deleveraged balance sheet, reduced debt obligations and sufficient liquidity to fund the Debtors’ post-emergence business plan. Additionally, the Alternative Transaction acts as a market check for the Restructuring Transactions, ensuring that the Debtors are pursuing a transaction that maximizes value for all stakeholders.
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 a DIP Facility Claim shall receive its allocated share of the New First Lien Term Loan Exit Facility;
- each Holder of a First Lien Secured Claim shall receive its Pro Rata share of and interest in, as applicable, (i) 96.5% – 100% of the New Common Stock (subject to dilution by a Management Incentive Plan, a New Money DIP Fee and an Exit Facility 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.”
The following is a summary of classes, claims, voting rights and projected recoveries (defined terms are in the Plan and/or Disclosure Statement, also see the Liquidation Analysis attached below)
- Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and estimated recovery is 100%.
- Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and estimated recovery is 100%.
- Class 3 (“First Lien Secured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $267.4mn and estimated recovery is 31.4% – 85.6%. Each Holder of an Allowed First Lien Secured Claim shall receive:
- with respect to any First Lien Credit Agreement L/C Secured 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 Secured Claims; and
- with respect to any First Lien Credit Agreement Secured Claims, its Pro Rata Share of and/or interest in (A)(1) if the Settlement is in effect, 96.5% of the New Common Stock (subject to dilution by the Management Incentive Plan, the New Money DIP Fee and the Exit Facility Fee), or (A)(2) if the Settlement is no longer in effect, 100% of the New Common Stock (subject to dilution by the Management Incentive Plan, the New Money DIP Fee and the Exit Facility Fee); and (B) the New Second Lien Term Loan Exit Facility (in an aggregate amount of $50.0mn); or
- in the event of an Alternative Transaction, its Pro Rata share of the Sale Proceeds up to the Allowed amount of such Claims, less (A) the Sale Proceeds distributed to Holders of Class 1 and Class 2 Claims and (B) the GUC Cash Recovery and Additional Cash Payment distributed to Holders of General Unsecured Claims.
- Class 4 (“Second Lien Secured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $0 and estimated recovery is 0%. The Debtors believe that, unless an Alternative Transaction occurs that pays First Lien Secured Claims in full, there are no Claims in Class 4 Second Lien Secured Claims. Each Holder of an Allowed Second Lien Secured Claim shall receive no recovery or distribution; provided that if, and only if, the Alternative Transaction occurs and Holders of Claims in Class 1, Class 2 and Class 3 have been paid in full or have otherwise received such treatment as such Holders are entitled to under the Plan, each Holder of a Second Lien Secured Claim shall receive its Pro Rata share of the Sale Proceeds up to the Allowed amount of such Claim, less (A) the Sale Proceeds distributed to Holders of Class 1, Class 2 and Class 3 Claims and (B) the GUC Cash Recovery and Additional Cash Payment distributed to Holders of General Unsecured Claims.
- Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $100.5mn and estimated recovery is 3.0% – 8.2%. If the Alternative Transaction does not occur, each Holder of a General Unsecured Claim shall receive (i) with respect to any Convenience General Unsecured Claim, its Pro Rata share of the GUC Convenience Recovery, provided that payment on account of each Convenience General Unsecured Claim shall not exceed 3.4% of such Allowed Claim; and (ii) with respect to any General Unsecured Claim that is not a Convenience General Unsecured Claim, its Pro Rata share of (A) the GUC Cash Recovery, less any Stakeholder Reimbursements; and (B) the GUC Equity Recovery.
If, and only if, the Alternative Transaction occurs, each Holder of an Unsecured Claim shall receive (i) its Pro Rata share of the Additional Cash Payment; (ii) its Pro Rata share of the GUC Cash Recovery, less any Stakeholder Reimbursements; and (iii) if and only if Holders of Allowed Claims in Class 1, Class 2, Class 3 and Class 4 have been paid in full or have otherwise received such treatment as such Holders are entitled to under the Plan, its Pro Rata share of the Sale Proceeds up to the Allowed amount of such Claim, less the Sale Proceeds already distributed to Holders of non-Class 5 Claims in accordance with the Bankruptcy Code.
Pursuant to the Settlement, the Holders of First Lien Deficiency Claims have agreed to waive any recovery on account of each respective Holder’s First Lien Deficiency Claims (including any right to turnover or similar relief with respect to the Second Lien Claims); provided that, to the extent any Holder of Second Lien Claims objects to the Settlement and seeks a recovery inconsistent with what is set forth in the Settlement Agreement, for those purposes only, the First Lien Deficiency Claims (including turnover and all rights under the First Lien/Second Lien Intercreditor Agreement) are preserved, but only with respect to the Claims held by the objecting Holders of Second Lien Claims (if any).
In the event that the Settlement is no longer in effect, then recovery on account of First Lien Deficiency Claims shall not be waived and Class 5 shall not be entitled to a recovery.
The estimated recoveries for General Unsecured Claims assume that (a) the Debtors do not deliver the alternative transaction notice set forth in Section 7.01 of Restructuring Support Agreement and/or pursue a sale transaction without the consent of the Required Consenting Lenders and the Supermajority Required DIP Lenders and the Restructuring Support Agreement is terminated as a result and (b) the Settlement is not voided by the Committee in accordance with the terms thereof. In those circumstances, the estimated recovery for Class 5 General Unsecured Claims is 0%.
- Class 6 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
- Class 7 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
- Class 8 (“Existing Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
The Debtors' claims agent notified the Court of the Plan voting results [Docket No. 584], which were as follows:
- Class 3 (“First Lien Secured Claims”): 103 claim holders, representing $251,500,909.56 in amount and 100% in number, accepted the Plan.
- Class 4 (“Second Lien Secured Claims”): 169 claim holders, representing $77,607,378.94 (or 99.72%) in amount and 84.08% in number, accepted the Plan. 32 claim holders, representing $219,544.67 (or 0.28%) in amount and 15.92% in number, rejected the Plan.
- Class 5 (“General Unsecured Claims”): 38 claim holders, representing $69,770,000.00 in amount and 100% in number, accepted 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."
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.
The Disclosure Statement [Docket Nos. 413 and 418] attached the following documents:
- Exhibit A: Plan of Reorganization (filed separately at Docket No. 412]
- Exhibit B: Restructuring Support Agreement [filed at Docket No. 434]
- Exhibit C: Financial Projections [Docket No. 418]
- Exhibit D: Liquidation Analysis [Docket No. 418]
The Debtors filed Plan Supplements at Docket Nos. 502, 579 and 592 which attached the following documents:
Docket No. 502
- Exhibit A: Governance Term Sheet [see Docket No. 592]
- Exhibit B: New Organizational Documents
- Exhibit C: New Shareholders Agreement:
- Exhibit D: Exit Facilities Documents
- Exhibit E: Restructuring Steps Memorandum [see Docket No. 579]
- Exhibit F: Identities of the Members of the Reorganized CPK Board and the Officers of Reorganized CPK [see Docket No. 592]
- Exhibit G: Rejected Executory Contract and Unexpired Lease List [see Docket No. 592]
- Exhibit H: Assumed Executory Contract and Unexpired Lease List [see Docket No. 592]
- Exhibit I: Schedule of Retained Causes of Action [see Docket No. 592]
Docket No. 579
- Exhibit E: Restructuring Steps Memorandum
- Exhibit H: Assumed Executory Contract and Unexpired Lease List
- Exhibit H-1: Redline to Version in the Initial Plan Supplement
- Exhibit I: Schedule of Retained Causes of Action
- Exhibit I-1: Redline to Version in the Initial Plan Supplement
Docket No. 592
- Exhibit A: Governance Term Sheet
- Exhibit F: Identities of the Members of the Reorganized CPK Board and the Officers of Reorganized CPK
- Exhibit G: Rejected Executory Contract and Unexpired Lease List
- Exhibit G-1: Redline to Version in the Initial Plan Supplement
- Exhibit H: Assumed Executory Contract and Unexpired Lease List
- Exhibit H-1: Redline to Version in the First Amended Plan Supplement
Liquidation Analysis (see Exhibit B to Docket No. 418 for notes)
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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