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Quiznos Follows Sbarro Into Bankruptcy Court

By Dawn McCarty and Leslie Patton
March 15, 2014 3:14 PM EDT 17 Comments
Signs hang in the window of a Quiznos Subs sandwich shop in Richmond, California.
Photographer: Justin Sullivan/Getty Images
Signs hang in the window of a Quiznos Subs sandwich shop in Richmond, California.

Quiznos Corp., the Denver-based toasted-sandwich chain, filed for bankruptcy days after pizzeria company Sbarro LLC sought protection from creditors, as competition among fast-food restaurants grows in a tight market.

Quiznos said it’s seeking to implement a reorganization that would cut debt by $400 million. Most of its senior lenders support the plan and the chain will keep operating during bankruptcy, according to a company statement yesterday.

Competition among U.S. restaurants has been increasing as newer fast-casual chains expand quickly. Sbarro filed for bankruptcy on March 10, while the owner of Hot Dog on a Stick filed last month, as foot traffic in shopping malls dwindled and chains such as Panera Bread Co., Chipotle Mexican Grill Inc. and Subway Restaurants cut into their business.

“It’s a survival of the fittest,” Bob Goldin, executive vice president at Chicago-based restaurant researcher Technomic Inc., said in a phone interview before yesterday’s filing. “The market is not growing, or it’s barely growing, so the weak players are getting weeded out.”

Quiznos said it will seek court approval of a $15 million loan from its senior lenders to continue operations as it restructures. The company expects to execute its plan and emerge from bankruptcy on an “accelerated basis,” according to the statement. An initial hearing is scheduled for March 17 in U.S. Bankruptcy Court in Wilmington, Delaware, where the case was filed.

Earlier Restructuring

In 2012, Quiznos underwent an out-of-court financial restructuring that eliminated about $300 million in debt and gave majority ownership to billionaire Marc Lasry’s Avenue Capital Group LLC through a $150 million equity infusion and debt-to-equity swap.

Quiznos, founded in 1981, operates restaurants in all 50 states and 34 countries, according to its website. It has about 2,100 stores, all but seven of them franchised, according to yesterday’s statement.

The chain sells toasted sub-style sandwiches and recently added pasta dishes, such as chicken pesto and macaroni and cheese with bacon, to its menu.

“They expanded too fast, they had a weak franchisee network,” Goldin said. “Once the Paneras of the world came along, I think, many consumers thought that was a better quality price point. And Subway came in on the lower end and aggressively promoted themselves as fresh.”

High Unemployment

High unemployment affected Quiznos’s stores, which are found primarily in office plazas and “high-end” shopping malls, the company said in a filing.

“As the economy declined, the debtors also began to face increased competition not only from the expansion of existing competitors, but also from the new sandwich and fast casual market entrants,” according to the filing.

Quiznos Chief Executive Officer Stuart K. Mathis said in yesterday’s statement that the company plans to cut food costs, make loans available to some franchisees for improvements and invest in advertising, as well as add technology to boost efficiency.

As of March 11, Quiznos had outstanding debt of $626 million, consisting of $445 million under a first-lien credit agreement, $174 million under a second-lien agreement and $7 million under a marketing fund trusts agreement, according to Chapter 11 documents filed yesterday in Wilmington.

Proposed Plan

Under the proposed restructuring plan, holders of first-lien facility claims will get a pro-rata share of $200 million and all equity in the reorganized company, amounting to a recovery of about 43 percent to 53 percent, according to court papers. Unsecured creditors may recover all or none of their allowed claims.

As of the time of filing, 100 percent of first-lien lenders that voted on the plan accepted it, according to court papers. Lenders who voted to accept represent about 88 percent of the principal amount outstanding under the first-lien credit agreement and about 87 percent of the number of first-lien lenders, excluding insiders, according to the papers. 

The largest claim unsecured by collateral is $173.8 million under a second-lien financing facility, according to court papers. Trade creditors include bakeries and Walt Disney Co.’s ESPN.

The case is QCE Finance LLC, 14-10543, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Dawn McCarty in Wilmington, Delaware, at dmccarty@bloomberg.net; Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editors responsible for this story: Andrew Dunn at adunn8@bloomberg.net Charles Carter

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