Sbarro Files for Prepackaged Chapter 11

MELVILLE, NY-Quick-service pizza chain Sbarro Inc. on Monday filed for pre-arranged Chapter 11 protection at US Bankruptcy Court in Manhattan. In court documents, the chain sought approval to enter a $35-million debtor-in-possession financing agreement with existing first-lien lenders. Sbarro says in a release that it expects to reduce its current obligations to about $175 million under a reorganization plan that would eliminate about $200 million of debt.

The locally based chain, with a base of more than 1,000 restaurants globally including 472 company-owned units and 555 franchisees, lists assets of $471 million and liabilities of $486.6 million in its bankruptcy filing. Its single largest creditor is the Bank of New York at $150 million, according to court documents.

In the release, Sbarro says MidOcean Partners III LP and Ares Corporate Opportunities Fund II LP have agreed to backstop a $30-million rights offering; proceeds will be used to repay the DIP and provide the reorganized business with additional equity capital and liquidity. “We believe this plan represents the best opportunity for Sbarro to clear a path for future growth by restructuring its debt in an effective and timely manner,” said Nicholas McGrane, Sbarro’s interim president and CEO, says in a statement.

The Wall Street Journal reported in January that Sbarro had tapped law firm Kirkland & Ellis LP in preparation for a possible bankruptcy filing after defaulting on debt. In court documents, the chain cites a recession-driven decline in mall traffic as a key factor contributing to its bankruptcy.