Castle Harlan Restaurant Chain Flirts With Bankruptcy

Beleaguered restaurant chain Perkins & Marie Callender’s Inc. has hired an advisor to explore financial alternatives and one of them could be Chapter 11 bankruptcy, according to analysts at Standard & Poor’s Ratings Services.

The ratings agency recently lowered the Castle Harlan Inc. portfolio company’s corporate credit rating to ‘D’ from ‘CC’ after it failed to pay a $9.5 million interest payment on $190 million in senior unsecured notes.

The company has been a problem for Castle Harlan for a few years now. It joins a cadre of restaurant chains that have limped into bankruptcy in the last year, assaulted by a combination of heavy debt loads, high food prices and cash-strapped consumers cutting back on eating out. Pizza chain Sbarro Inc., owned by MidOcean Partners, recently filed for bankruptcy, as has Uno Chicago Grill pizza, Fuddruckers and Charlie Brown’s Steakhouse.

Perkins & Marie has a 30-day grace period but the S&P analysts don’t think it will make the payment. To make matters worse, the company has another interest payment around the corner, on May 31, which S&P also doubts the company can make. The Memphis, Tenn.-based family dining chain recently hired Whitby Santarlasci & Co., a Washington, D.C.-based investment bank, to help it sort through the morass, according to S&P.

Castle Harlan, which has a long history of investing in restaurants, bought Perkins & Marie back in 2005 for $245 million in cash, of which $65 million was equity, according to Capital IQ. The investment came out of Castle Harlan Partners IV LP, a $1.2 billion vehicle closed in 2003.

Trouble started in 2008, as consumers started tightening their belts amid rising fuel costs and the home mortgage crisis that presaged the darker economic downturn to come. Standard & Poor’s lowered its ratings on the company and since then it’s been a serial occupant of the ratings agency’s notorious “Weakest Links” list of companies with dubious credit ratings and a negative outlook. In 2010, Castle Harlan founder John Castle told Buyouts in a profile of the firm that it was betting on a $10 million cost-reduction program to help turn things around, but apparently it wasn’t enough.

Standard & Poor’s also lowered its issue-level rating on the company’s $190 million senior unsecured notes due Oct. 1, 2013 to ‘D’ from ‘C.’ The ratings agency’s recovery rating on the notes is ‘6,’ meaning it expects creditors to see a negligible recovery of up to 10 percent of principal in the event of a payment default.

Through a spokesman, Castle Harlan declined to comment.

Luckily for Castle Harlan, the firm has some better stories to tell from its fourth fund. Last year it sold garden equipment maker Ames True Temper Inc.—which, like Perkins & Marie, had for some time been a regular on “Weakest Links” list—for 2x invested capital. Other fund IV success stories include Australian cable television Austar United Communications Ltd., which generated 7.2x invested capital after a two-and-a-half-year hold period. Polypipe Group, a British supplier of plastic pipes for sanitary systems, and United Malt Holdings, a maker of malt for beer and liquor, both generated 4.5x returns after relatively short holding periods.