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October 26, 2020 – Rubio's Restaurants, Inc. and three affiliated Debtors (dba "Rubio's Coastal Grill," “Rubio's” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-12688. The Debtors, operators and franchisors of approximately 170 limited service restaurants in California, Arizona and Nevada, are represented by Ryan M. Bartley of Young Conaway Stargatt & Taylor LLP. Further board-authorized engagements include (i) Ropes & Gray LLP as general bankruptcy counsel, (ii) Mackinac Partners LLC as restructuring advisors, (iii) Gower Advisers as investment banker, (iv) B. Riley Financial, Inc. as real estate advisor and (v) Stretto as claims agent.
The Debtors’ lead petition notes between 5,000 and 10,000 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Sunwest Bank ($10.0mn PPP Loan claim, which the Debtors do not intend to repay), (ii) Southwest Traders Corporation ($3.2mn trade claim) and (iii) Internal Revenue Service ($2.5mn CARES Act – Payroll Tax Deferral claim).
In 2010, Mill Road Capital, L.P. (the "Investor") acquired Rubio’s in a take- private transaction for $91.0mn (cash).
Overview of the Plan
The Plan implements a prepackaged restructuring agreed to among the Debtors and the Debtors’ major stakeholders, including the "Consenting Secured Lenders" [ie holders of more than 66.6% of the aggregate amount of all outstanding Loan Claims] and the Investor. The restructuring will result in a deleveraging of the Debtors’ capital structure, as reflected in the chart below:
3 This amount includes: (i) $37.0 million in accordance with treatment of Class 3 Secured Loan Claims under the Plan; (ii) $8.0 million in DIP Claims to be converted on a dollar-for-dollar basis into loans under the Exit Facility; and (iii) an additional $7.0 million in available liquidity.
The Disclosure Statement provides: "The anticipated benefits of the Plan include, without limitation, the following:
(a) Conversion of approximately $55.0 million of Secured Loan Claims to equity and an exit facility;
(b) Treatment of approximately $18.0 million of Secured Lender Deficiency Claims as General Unsecured Claims under the Plan;
(c) A $8.0 million DIP Facility from the DIP Lenders; and
(d) Prompt emergence from chapter 11.
The Plan provides for a comprehensive restructuring of the Debtors’ prepetition obligations, preserves the going-concern value of the Debtors’ business, maximizes all creditor recoveries, and protects the jobs of the Debtors’ invaluable employees, including Management. As described in further detail below, under the terms of the Plan, among other things, each Holder of Secured Loan Claims will receive, on account of their Secured Loan Claims, a Pro-Rata Share of (A) a portion of the Exit Facility (after accounting for the Exit Conversion Amount) in a principal amount equal to $37.0 million and (B) the Reorganized Equity Interests."
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below)
- Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Holders will be paid in full in cash.
- Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Holders will be paid in full in cash.
- Class 3 (“Secured Loan Claims”) is impaired and entitled to vote on the Plan. Recovery is 100% and each Holder shall receive their Pro-Rata Share of: (A) a portion of the Exit Facility (after accounting for the Exit Conversion Amount) in a principal amount equal to $37.0mn and (B) the Reorganized Equity Interests.
- Class 4 (“General Unsecured Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. Recovery is 0% and holders of General Unsecured Claims will not receive any distribution on account of such General Unsecured Claims.
- Class 5 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Recovery is 100%/0%.
- Class 6 (“Subordinated Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. Recovery is 0% and holders of will not receive any distribution on account of such claims.
- Class 7 (“Equity Interests in Holdings”) is impaired, deemed to reject and not entitled to vote on the Plan. Recovery is 0% and holders will not receive any distribution on account of such claims.
- Class 8 (“Intercompany Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Recovery is 0% and holders will not receive any distribution on account of such claims.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Kibler Declaration”) [Docket No. 2], Melissa Kibler, the Debtors’ Chief Restructuring Officer and a Senior Managing Director at Mackinac, detailed the events leading to Rubio's' Chapter 11 filing. The Declaration notes that "as is the case with nearly every other restaurant chain in the country…the Debtors have spent the last eight months navigating the challenges imposed by the COVID-19 pandemic," but the Debtors faced significant operational issues prior to the advent of the pandemic. Foremost amongst these were (i) the evolving nature of the "ultra-competitive fast casual dining sector," (ii) lower margins as the Debtors turned to third party delivery services to address the explosion in digital ordering and delivery and (iii) higher wage costs do to rising minimum wages and the application of the Affordable Care Act.
The Kibler Declaration provides: “The Debtors operate in the ultra-competitive fast casual dining sector, competing with everything from national and multi-state chains, to local chains and individual restaurants. The fast casual model is expected to continue to grow relative to other food service models. However, the Debtors have had to increase spending to compete effectively and maintain the Rubio’s customer base in light of the expansion of existing fast casual competitors, the launch of new formats and operators, and the deployment of new technologies to reach and engage customers.
With the maturation and success of the fast casual model, many casual dining and fast food restaurants have shifted toward the fast casual model to win back customers. Such restaurants have introduced better, healthier and more sustainable ingredients, and new customer interaction technologies, ultimately blurring the distinctions between service models. Fast casual chains themselves pursued aggressive expansion in urban centers where many early fast casual concepts were introduced, as well as in suburban and other areas. This all led to increased competition for customers, particularly during the lunch daypart, which had a direct impact on growth of the fast casual segment.
The past decade has seen incredible growth in food delivery. Customers can easily order a wide variety of food online or from mobile devices and have it delivered to their home or workplace within a short time span. Digital ordering and delivery, including through third party delivery services, has grown 300% faster than dine-in traffic since 2014…..The Debtors’ introduction of digital ordering and delivery services has amplified their ability to reach customers, but the Debtors’ reliance on third party dispatch and delivery platforms has impacted margins and may reduce customer loyalty over the longer term by lowering switching costs. As such, and because the in-store experience features less prominently today in the overall customer value proposition, the Debtors must work harder and more creatively to differentiate their offerings from the competition.
Minimum wage increases in many of the Debtors’ key markets, especially in California, have impacted margins and are expected to continue to impact margins through 2022, the date of the last scheduled increase…..As of September 2020, the impact on average wage for the average employee has been an addition of approximately $1.70 per hour.
[I]n mid-2017, as the result of a new IRS rule related to the Affordable Care Act, the Debtors were forced to terminate certain employees, including over 30% of their line chefs (the most important crew position in their restaurants), with an average of nine and one half (9.5) years of experience with the Debtors. Training the less experienced workers hired to replace them diverted critical resources, including Management’s time. New store openings in Northern California and Florida suffered as a result. The transition required the Debtors to reduce store hours in the tightest labor markets and resulted in reduced employee oversight.”
On May 29, 2020, the Debtors engaged B. Riley Real Estate to perform, together with Mackinac Partners, an analysis of the Debtors’ store base to identify locations that either (i) should remain open, (ii) should be closed or (iii) may remain open if negotiations with landlords to reduce rent costs are successful. Upon conclusion of the analysis, B. Riley developed a plan to be implemented post-petit ion to re-negotiate terms of the various existing leases in its three remaining markets. The Debtors permanently closed 26 stores based on unsustainable operating losses and identified a number of other stores with unsustainable profitability levels that the Debtors believe can remain open only if satisfactory concessions are received from the properties’ landlords. The degree of success of the negotiations with landlords will determine whether additional closures are necessary to right-size the Debtors’ leasehold portfolio. In an effort to preserve cash during this uncertain time, the Debtors generally did not pay rent for approximately three months after the onset of the COVID-19 pandemic and continued to negotiate deferrals thereafter. After that time, the Debtors negotiated specific arrangements with each landlord to address its ongoing obligations and entered into deferral agreements with approximately 60 landlords, resulting in deferred rent of approximately $7.2 million as of the Petition Date.
The Debtors have commitments for $8.0mn of debtor-in-possession (“DIP”) financing, ($4.5mn with interim DIP order) by GCI Capital Markets LLC.
As of the Petition date, the Debtors have approximately $82.3mn of outstanding funded debt obligations (exclusive of accrued interest and fees). The following charts depict the Debtors’ corporate and capital structure:
Liquidation Analysis (see Exhibit B to Disclosure Statement for notes)The following documents were attached to the Disclosure Statement:
- Exhibit A: Joint Prepackaged Chapter 11 Plan of Reorganization
- Exhibit B: Liquidation Analysis
- Exhibit C: Valuation Analysis
- Exhibit D: Financial Projections
- Exhibit E: Corporate Organizational Chart
About the Debtors
The Kibler Declaration states: "The Debtors are operators and franchisors of approximately 170 limited service restaurants in California, Arizona and Nevada under the Rubio’s Coastal Grill concept.
Ralph Rubio co-founded Rubio’s in 1983 after repeated trips to Mexico as a college student…The first Rubio’s location was a walk-up stand in Mission Bay, San Diego….After tremendous growth in the late 1980s and 1990s, Rubio’s completed an initial public offering in May 1999, trading on the NASDAQ National Exchange under the ticker symbol “RUBO.” Ralph stepped down as CEO in 2001 but remained actively involved as head of the culinary team, co-founder and Chairman. In 2010, Mill Road Capital, L.P. (the “Investor”) acquired Rubio’s in a “take- private” transaction for $91 million.
The Debtors employ more than 3,400 hourly and salaried employees at their restaurants and corporate offices located in Carlsbad, California.
Corporate Structure Chart
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