Sbarro Exits Chapter 11; Backers Lose

Sbarro, which is no longer backed by MidOcean Partners, has successfully come out of bankruptcy, sister Web site peHub reported.

The quick service restaurant said on Nov. 28 that it had emerged from Chapter 11 with significantly reduced debt and a $35 million capital infusion. “Our reorganization plan eliminates more than 70 percent of our debt, and provides access to $35 million in fresh capital from our new ownership group,” said Nicholas McGrane, Sbarro’s interim president and CEO, in a statement.

Melville, N.Y.-based Sbarro sells pizza, pastas and salads via more than 1000 restaurants across 40 countries (476 are company-owned restaurants and 538 franchised restaurants, Buyouts reported in March). Many of its stores are located in malls, which have suffered during the economic downturn.

MidOcean Partners, a New York mid-market firm, acquired Sbarro in 2007. The firm paid about $450 million for the pizza chain, which included at least $208 million in debt, Buyouts reported. Ares Management also owned some debt. Sbarro, which was teetering under a near $400 million debt load, filed for Chapter 11 bankruptcy protection in April. The company did try to sell itself out of bankruptcy but those talks failed.

With its reorganization, Sbarro did manage to cut its debt to about $123.3 million from roughly $403.3 million prior to the bankruptcy, according to a Nov. 23 report from Standard & Poor’s Rating Services. But Sbarro remains highly leveraged because of all its operating lease commitments, said Mariola Borysiak, an S&P credit analyst. ”Leverage remains very high at over 8x” total debt to EBITDA, she said.

The bankruptcy also wiped out MidOcean’s stake, Borysiak said. “MidOcean had a second lien facility and currently first lien lenders are the owners of the company,” she said. Ares’s stake was also wiped out, said a person familiar with the situation.

Officials for Ares and MidOcean couldn’t be reached for comment.

(Luisa Beltran is a senior writer for peHub.)