By SARAH  E.  LOCKYER

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NEW YORK (Aug. 25, 2008 ) —Debt is just a four-letter word for some restaurant companies.

This month more revelations of arduous negotiations with lenders and possible loan defaults came to light as restaurants struggle with lower sales and higher costs, effectively eliminating the necessary cash cushion used to service debt.

(To view charts featured in this week's financial pages, click here.)

According to a Standard & Poor’s report, Sagittarius Restaurants LLC, the franchisor to the Captain D’s and Del Taco chains, avoided bankruptcy by making “onerous concessions” to its lenders, including ceilings on spending, higher interest rates and plans for sale-leasebacks or sales of owned property.

Uno Restaurant Holdings Corp., the parent of the Uno Chicago Grill chain, skipped on Aug. 15 a twice-yearly interest payment on its notes and will use the 30-day grace period to work with lenders on a recapitalization.

At Sbarro Inc., parent of the namesake Italian quick-service chain, a nearly halved operating profit in its latest quarter made it “vulnerable to nonpayment” on its loans and credit facility, the S&P said.

Possibilities of nonpayment on interest charges, breaches of lending terms or technical loan defaults can lead to even tougher access to capital, liquidity issues and less financial flexibility. Other companies in trouble, according to the S&P report, include El Pollo Loco, Perkins & Marie Callender’s and Real Mex Restaurants.

It’s another sign of the times, experts say, and a situation that operators have little control over.

For anything to change, “the economy must turn around,” said Ana Lai, a credit analyst at S&P and author of the report.

“Companies in this situation just need to survive,” she said, “manage costs even tighter, cut [capital expenditures], preserve cash until things get better—because it will get better, it’s just that no one knows when.”

In recent months talk of debt restructuring has been followed with either bankruptcy filings or more expensive capital structures. The parent companies of such chains as Ryan’s Steakhouse, Old Country Buffet, Village Inn and Bakers Square—and most recently the corporate units of Bennigan’s and Steak and Ale—have all filed for bankruptcy.

According to a Standard & Poor’s report, Sagittarius Restaurants LLC, the franchisor to the Captain D’s chain, agreed to spending ceilings, higher interest rates and planned real estate sales to satisfy its lenders.

Some companies, such as Ruby Tuesday Inc. and Perkins & Marie Callender’s, have been successful in restructuring debt, although at a higher cost of capital.

As more bad news floods the industry, negotiations with lenders become even more difficult.

“Some lenders are still granting waivers or concessions” Lai said, “but that comes at a steep price. We’ve seen cases where lenders can get pretty demanding on how companies run their business.”

By SARAH  E.  LOCKYER

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At Sagittarius, for example, lenders took “considerable control” of the restaurant company’s capital, calling for any near-term cash flow generated from the business or from asset sales to be distributed to the secured lenders, the S&P reported. The company, based in Lake Forest, Calif., was unavailable for comment at press time.

Until an economic turnaround occurs, the restaurant industry may see more debt troubles, loan defaults and bankruptcy filings, experts say.

“Certainly there are some situations when you need to turn off the lights,” said Dean Zuccarello, chief executive and founder of middle-market investment bank The Cypress Group in Denver. “But more often than not [the business] can be restructured.”

Zuccarello said the biggest mistake operators make when faced with a possible default or a pending covenant breach is a lack of urgency.

“People wait way too long,” he said. “They are hoping the problem will go away or the market will change. They should be more proactive in reaching out to lenders early on or engaging help with outside resources.”

At Boston-based Uno Restaurant Holdings, the decision to hold off on a twice-yearly interest payment triggered a rating cut from S&P. But company chief executive Frank Guidara said Uno does not face a liquidity issue. He said the company has been working with outside bankers to structure a new capital plan for Uno, a system of more than 200 casual-dining restaurants.

Del Taco parent Sagittarius Restaurants LLC avoided bankruptcy by making concessions to its lenders, according to an S&P report.

“We’re doing this from a position of strength,” Guidara said.

As a privately held company, Uno does not release financial results or information. Private-equity firm Centre Partners holds a majority interest in the company.

Guidara said Uno’s latest-quarter sales fell 1.7 percent from a year ago, but its earnings before interest, tax, depreciation and amortization, or EBITDA, beat year-ago numbers.

“We just spoke to our bondholders,” he said. “They are happy with where we are at…it’s basically recapitalize for fast growth or stay where we are for slow growth…and I like fast growth.”

S&P said Uno’s credit ranking, which is at CC, or “highly vulnerable to nonpayment,” also holds a negative outlook with the ratings firm.

In a “state-of-the-state” memo to the Uno system, a copy of which Nation’s Restaurant News reviewed, Guidara said the recapitalization will allow Uno to continue growth of its fast-casual concept, Uno Due Go!, and additional express units in BJ’s Wholesale Clubs.

“We have been held back…by a balance sheet with too much debt,” the memo stated. “There’s no doubt, we pay a lot of money in interest to cover our debt. Should we be successful, this recapitalization will…permit us to take advantage of the many opportunities our success is generating.”

At Melville, N.Y.-based Sbarro, which operates or franchises 1,064 restaurants, ratings on the company’s notes, $183 million loan and $25 million credit facility all were lowered by the S&P “because poor operating performance is continuing to erode EBITDA,” said S&P credit analyst Mariola Borysiak.

The analyst said Sbarro—which holds ratings as high as Band as low as CCC-, all of which are deemed “vulnerable to nonpayment”—could be out of compliance in the fourth quarter, when maximum leverage ratios under the company’s agreements become more restrictive.

Calls to Sbarro officials were not returned by press time.

Sbarro reported earlier this month that its EBITDA, as calculated according to the terms of its bank credit agreement, totaled $5.5 million for the quarter ended June 29, down from $9.7 million a year ago. The company blamed increased commodity costs, particularly for cheese, flour and pasta, as well as increased labor costs. Sbarro also reported a “slight decrease” in same-store sales at domestic restaurants.

The company’s second-quarter net loss widened to $5 million, versus a loss of $2.4 million in the year-ago quarter. Revenue rose 3.4 percent to $85.4 million. Sbarro is owned by private-equity firm MidOcean Partners LP.