Pizza chain Sbarro’s Inc. continues to give
Moody’s Investor’s Service, the ratings agency, on March 11 revised the Melville, N.Y.-based company’s probability of default rating to Ca/LD from Ca. The rating action, which Moody’s bestows on companies in default on a limited set of debt obligations, follows Sbarro’s failure to make a February interest payment on its 10.375 percent notes due 2015, the grace period for which ended on March 3. Sbarro’s also announced that it has entered into a third forbearance agreement with lenders under its first-lien credit statement.
In perhaps its most dire assessment yet of Sbarro’s, Moody’s said its ratings outlook is negative, reflecting “the uncertainty with regards to Sbarro’s ability to remain a going concern.”
Sbarro’s, which according to Moody’s generates about $333 million in annual revenues, hasn’t been the only problem for
Sbarro’s sells pizza and other Italian food through 476 company-owned restaurants and 538 franchised restaurants. MidOcean bought the company at perhaps the worst possible time. In January 2007, about the peak of the then-booming economy, the firm paid approximately $450 million, with at least $208 million in debt financing led by Credit Suisse Securities and Bank of America Securities.
Only a few months later the credit markets chilled and the Great Recession took hold. Cautious consumer spending and rising prices for flour and cheese—two critical ingredients for pizza—spiked in 2008, making it more expensive for Sbarro’s to do business. The cost of cheese in the first nine months of 2008 increased nearly 20 percent to an average of about $2.18 per pound compared to an average of about $1.82 per pound in 2007, as Buyouts previously reported.
Still, Sbarro’s has continued to expand, but bad luck has struck that effort too. In 2010, it announced plans to open 1,250 restaurants throughout Japan, still reeling from the recent earthquake and tsunami catastrophe. The company also has plans to open locations in Brazil.
Meanwhile, MidOcean is trying to stabilize some other struggling Fund III deals. Last year Penton Media Inc., the print and online publisher of National Hog Farmer, Modern Baking, and other B-2-B titles, went through a pre-packaged Chapter 11 process. And U.K. fitness chain LA Fitness was operating at a loss as of May 2010, when the company launched a three-year turnaround plan.
In November 2009 MidOcean, which does not specialize in turnarounds, hired turnaround specialist Steve Miller, who reportedly helped revive businesses such as Delphi Corp., Bethlehem Steel and Federal-Mogul Corp., as its chairman.
MidOcean executives declined to comment.