Quiznos filed for Chapter 11 bankruptcy protection on Friday after lenders approved a pre-packaged restructuring plan that will reduce debt by more than $400 million.
The plan is designed to increase the company’s flexibility as it works to strengthen the chain’s performance, revitalize the brand and “reinforce its promise as a fresh, high-quality and great-tasting alternative to traditional fast-food offerings,” the company said in a statement.
Denver-based Quiznos has been rumored to be working with creditors to address its $570 million debt load for weeks. The restructuring plan includes a commitment for $15 million in debtor-in-possession financing from senior lenders to support ongoing operations, which is subject to court approval. Because lenders voted “overwhelmingly” in favor of the pre-packaged restructuring, the company is expecting to emerge from bankruptcy quickly.
“The actions we are taking are intended to enable Quiznos to reduce our debt, execute a comprehensive plan to further enhance the customer experience, elevate the profile of the brand and help increase sales and profits for our franchise owners,” Stuart Mathis, Quiznos’ chief executive, said in a statement. “We look forward to continuing to work with and support our global network of franchise owners, who are the backbone of our business.”
The bankruptcy filing, which was made in the U.S. Bankruptcy Court in Wilmington, Del., does not directly impact most of the 2,100-unit restaurant chain, which is almost entirely operated by franchisees across the U.S. and in 30 countries. Only seven locations are company owned.
The chain’s restaurants are open and operating as usual, the company said. Distribution centers are also open and fulfilling orders, and the company is working with suppliers to ensure products are delivered on time.
Mathis added that the plan includes initiatives to further support franchisees, including a reduction in food costs and the implementation of a franchise-owner rebate program. In some circumstances, the company will make loans available for franchisees to make restaurant improvements and invest in advertising to improve location awareness, he said. Incentives will also be created to entice new franchise operators to join the system.
The franchisor is also rolling out a new point-of-sale system to all restaurants. The company will pay for the development and installation of the system, and the supplier is providing the equipment, company officials said.
Representatives of Quiznos’ franchisee association could not immediately be reached for comment, but the group has long argued that the chain’s business model is broken. In ongoing lawsuits, operators have said profitability has been thwarted by hidden markups on food and supplies they are contractually obligated to buy from the company’s supply arm. Last month, however, the group expressed confidence that the restructuring effort would allow long-overdue progress on proposed changes to the chain’s business model.
Meanwhile, Quiznos’ unit count has dwindled from more than 5,000 units during its heyday in 2006 to 1,450 domestic locations at the end of fiscal 2013. Though the brand is growing overseas, where it has 670 locations, U.S. franchise operators have seen estimated sales per unit drop to about $291,000 in 2012, compared with $405,800 in 2005, according to franchise disclosure filings.
Two years ago, Quiznos avoided bankruptcy with a debt-for-equity swap that shifted ownership to New York-based hedge fund Avenue Capital Group. At the time, the hedge fund injected about $150 million into the sandwich chain and cleared about one-third of the then-$870 million debt.
Under the proposed restructuring, Avenue Capital’s holdings will be reduced, and a group of senior lenders will hold a controlling stake of about 70 percent, according to sources close to the deal.
John Gordon, principal with Pacific Management Consulting Group in San Diego, said the question still remains how Quiznos will emerge from bankruptcy, given remaining debt and the need to repay the DIP financing. “Some other funding solution has to come in later,” he said.
Quiznos is the second restaurant company this week to seek Chapter 11. On Monday, Sbarro LLC also filed bankruptcy as part of a restructuring plan.