Rubio’s Restaurants, Inc. – Notifies Court of December 30th Effectiveness Date for Prepackaged Plan as Fish Taco Specialist Emerges Controlled by Golub Capital and Mill Road Capital

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December 30, 2020 – The Debtors notified the Court that their Second Amended Prepackaged Chapter 11 Plan of Reorganization had become effective as of December 30, 2020 [Docket No. 329]. The Court had previously confirmed the Debtors’ Plan on December 22, 2020 [Docket No. 307].

On 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 (Judge Walrath). At filing, the Debtors, operators and franchisors of approximately 170 limited service restaurants in California, Arizona and Nevada, noted estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mn. In a subsequently filed Schedule A/B, the lead Debtor noted $34.9mn of assets and $102.1mn of liabilities [Docket No. 190].

The Debtors were represented by (i) Young Conaway Stargatt & Taylor LLP as local bankruptcy counsel (ii) Ropes & Gray LLP as general bankruptcy counsel, (iii) Mackinac Partners LLC as restructuring advisors, (iv) Gower Advisers as investment banker, (v) B. Riley Financial, Inc. as real estate advisor and (vi) Stretto as claims agent.

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” [i.e. Golub Capital or "Golub", holder of more than 66.6% of the aggregate amount of all outstanding Loan Claims] and "the Investor" [Mill Road Capital, L.P. founded by Blackstone alumni]. Golub and the Investor are contributing $13.0mn in additional liquidity ($7.0mn and $6.0mn, respectively) and have entered into a Equity Holders Agreement which is filed at Docket No. 284 (see brief summary of the shareholder arrangements below).

 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 Debtors' Memorandum of Law in Support of Plan Confirmation [Docket No. 291] notes, “The Plan, which is the product of weeks of negotiations with the Debtors’ secured lenders (the ‘Prepetition Secured Lenders’ [Golub)] majority equity holder (the ‘Investor’ [ie Mill Road Capital, L.P.]) and the Committee, provides a clear path to emergence from chapter 11. The Plan provides for, among other things: (a) an efficient restructuring through a prepackaged plan designed to minimize disruption to the Debtors’ business operations; (b) a substantially deleveraged balance sheet for the Debtors; (c) a platform for future success through the rationalization of the Debtors’ lease footprint; (d) up to $1,000,000 for general unsecured creditors who elect to opt-in to the releases; and (e) additional liquidity of up to $13 million, comprised of new money funding and post-emergence revolver availability under the Exit Facility and the Investor’s $6 million new money equity investment to help fund business operations as a going concern."

The Disclosure Statement [Docket No. 15] 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 [Docket No. 278] 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 [ie Golub] 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%. Each Holder shall receive 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 $37.0mn 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%. Holders of General Unsecured Claims will not receive any distribution on account of such General Unsecured Claims. However, those who sign and return the opt-in in respect of releases will get their pro rata share of a claims cash pool (maximum of $1.0mn), provided that no holder of a General Unsecured Claim will be entitled to receive more than 18% of the amount of their claim. The Second Amended Plan further specifies that “Claims Cash Pool” means Cash, in amount equal to the lesser of (a) $1,000,000 and (b) the sum of (i) $650,000; plus (ii) the amount, if any, by which the aggregate amount of Allowed Professional Fee Claims of the Committee’s Professionals are less than $400,000; plus (iii) the amount, if any, by which the aggregate amount of Allowed Professional Fee Claims of the Debtors’ Professionals are less than $3,302,000; which Cash will fund the Claims Cash Pool Account and be distributed in accordance with the terms and conditions of the Plan. After all distributions have been made to the Holders of General Unsecured Claims that timely deliver an Opt-In Proof of Claim Form, any and all Cash remaining in the Claims Cash Pool Account shall be indefeasibly paid to the Reorganized Debtors.
  • 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%.
  • Class 7 (“Equity Interests in Holdings”) is impaired, deemed to reject and not entitled to vote on the Plan. Recovery is 0%.
  • Class 8 (“Intercompany Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Recovery is 0%.

Voting Results

On October 26, 2020, the Debtors' claims agent notified the Court of the Plan voting results, which were as follows [Docket No. 34]:

  • Class 3 (“Secured Loan Claims”): 3 claim holders, representing $55,000,000 in amount and 100% in number, accepted the Plan.

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.”

Lease Negotiations

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.

DIP Financing

On December 1, 2020, the Court hearing the Rubio’s Restaurants, Inc. cases authorized the Debtors to access the $3.5mn balance of an $8.0mn debtor-in-possession (“DIP”) financing facility being provided by their prepetition lender (fka, GCI Capital Markets LLC, "Golub") [Docket No. 225]. An October 28, 2020 interim order had given approval for a first $4.5mn tranche [Docket No. 63]. 

Prepetition Indebtedness

As of the Petition date, the Debtors have approximately $82.3mn of outstanding funded debt obligations (exclusive of accrued interest and fees). The following chart depicts the Debtors’ prepetition capital structure:

Equity Holders Agreement

The recitals of the agreement provide a brief overview of the shareholder arrangements: 

"WHEREAS, pursuant to the Plan, the Lenders (as defined below) under the Credit Agreement, dated as of August 24, 2010 (as amended, restated, supplemented or otherwise modified from time to time, the "Existing Credit Agreement"), among Rubio's Restaurants, Inc., the other 'Loan Parties' party thereto, GCI Capital Markets LLC ('Golub') and the other financial institutions party thereto (the 'Lenders'), received 100% of the issued and outstanding common stock of Existing Holdco (the 'Exchange Common Stock') in satisfaction of, and exchange for, certain obligations under the Existing Credit Agreement;

WHEREAS, pursuant to an Exchange and Contribution Agreement, dated as of [____], 2020, the Lenders contributed the Exchange Common Stock to the Company in exchange for the issuance by the Company of [10,000,000] of Class A Preferred Units and the number of Class A Common Units and Class B Common Units set forth therein (the 'Contribution');

WHEREAS, following the Contribution and pursuant to the Unit Purchase Agreement, the Lenders sold to Mill Road Capital, L.P., a Delaware limited partnership ('Mill Road LP' and together with the Lenders, the 'Initial Members'), and Mill Road LP purchased from the Lenders, the portion of the Class B Common Units acquired by the Lenders in the Contribution (the 'Mill Road Unit Purchase') as set forth therein;

WHEREAS, following the Mill Road Unit Purchase and pursuant to the Subscription Agreement, dated as of [____], 2020, Mill Road LP subscribed for [2,000,000] Class A Preferred Units and the number of Class A Common Units and Class B Common Units set forth therein…"

Liquidation Analysis (see Exhibit B to Disclosure Statement [Docket No. 15] for notes)

Key Documents

Key Documents

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

The Debtors filed Plan Supplements at Docket Nos. 224, 280, 284, 299 and 305 which attached the following documents:

  1. Exhibit A: Supplemental Section 1129(a)(5) Disclosures [Docket No. 299]
  2. Exhibit B: Exit Facility Credit Agreement
  3. Exhibit C: New Organizational Documents [Docket No. 284], including
  1. Revised Equity Holders Agreement 
  2. Charter Amendment for MRRC Hold Co.
  3. Charter Amendment for Rubio’s Restaurants, Inc. 
  4. Charter Amendment for Rubio’s Restaurants of Nevada, Inc. 
  5. Amendment to LLC Agreement for Rubio’s Incentives, LLC 
  • Exhibit D: Revised Management Incentive Plan (Restricted Unit Grant Agreement) [Docket No. 284]
  • Exhibit E: Retained Causes of Action
  • Exhibit F: Revised Assumed Executory Contracts and Unexpired Leases Schedule [Docket No. 327]
  • Exhibit G: Reorganized Equity Interests To Be Issued under the Plan [Docket No. 327]

About the Prepetition 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.

About Golub Capital 

According to Golub: "Golub Capital is a market-leading, award-winning direct lender and credit asset manager, with over $30 billion of capital under management. Golub Capital specializes in delivering reliable, creative and compelling financing solutions to middle market companies backed by private equity sponsors. The firm’s credit expertise also forms the foundation of its Late Stage Lending business and its Broadly Syndicated Loan investment program. Across its activities, Golub Capital nurtures long-term, win-win partnerships that inspire repeat business from its private equity sponsor clients and investors. Founded over 25 years ago, Golub Capital today has over 500 employees and lending offices in Chicago, New York and San Francisco.

About Mill Road Capital

According to Mill Road: "Since its founding in 2004, the firm has successfully executed its investment strategy of identifying and partnering with management teams that are focused on long term value creation.  Our current portfolio consists of companies in a broad range of industries, including retail, manufacturing, business services, and consumer products.    

The firm was founded by Thomas Lynch and a core group of former Blackstone investment professionals. Over the course of a two decade investing career, Mr. Lynch has founded and led two private equity funds."

Prepetition Corporate Structure Chart

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