MELVILLE N.Y. Sbarro Inc., the parent to more than 1,075 Italian quick-service restaurants, has amended its credit facilities after a fiscal 2008 that saw declining sales and profit lead to non-compliance with its debt covenants.
After negotiations with its banking partners that began last month, Sbarro said last week it was able to obtain a waiver for its non-compliance, which centered on the company’s total net leverage, as well as change terms of its $183 million term loan and $25 million revolving credit facility.
The company plans to file details of the new agreements, along with its annual report for 2008, on Monday. As of the latest available filing for the quarter ended Sept. 28, the company held about $329 million in long-term debt.
Sbarro, which posted a same-store sales decline of 6.9 percent for the quarter ended Dec. 28, and an annual same-store sales drop of 2.2 percent, has been on debt rating agencies' watch lists for most of last year. Its earnings before interest, tax, depreciation and amortization, fell 28.5 percent to $17.1 million for the fourth quarter and declined 25.0 percent to $43.7 million for the full year. The chain’s weakened performance was blamed on slow consumer traffic at shopping malls, where many Sbarro restaurants are located.
The company’s declining sales and earnings, coupled with its high level of debt, made it susceptible to a breach of debt agreements, analysts had said. Last month Sbarro was included on Moody’s Investors Services list of “bottom rung” companies most expected to default. Many in the restaurant industry have had similar problems, and experts predict that this year will include numerous debt refinancing at higher costs, or increased defaults.
“Many restaurants’ credit profiles will continue to weaken in 2009,” said a Fitch Ratings report on the U.S. foodservice sector. “Highly leveraged restaurants that are experiencing persistent declines in same-store sales, generate negative free cash flow, and require multiple amendments to credit facilities are most vulnerable.”
Last week, Sbarro said the changes to its facility will increase its operating flexibility and increase the margin on both the term loan and the revolver by 200 basis points, or 2 percent. The amendment also permitted the company to refinance a portion of its first lien term loan with a new $25.5 million second lien credit facility. That facility has been signed and funded by an affiliate of the company’s equity sponsor, MidOcean Partners. It holds an annual interest rate of 15 percent.
The company said it used the borrowings under the second lien credit facility to prepay $25 million of its outstanding first lien term loan. In addition, as required by the new amendments, Sbarro repaid $3.5 million of the outstanding revolving facility from cash on hand, and the commitment under the revolver has been permanently reduced by that amount, to $21.5 million.
Contact Sarah E. Lockyer at [email protected].