More often than not, a restaurant entity auctioned by the bankruptcy courts ends up changing hands, but that’s not what is expected to happen when the assets of Friendly Ice Cream Corp., parent of 424-unit Friendly’s, hit the block in December.
The 76-year-old family-dining brand, which filed for Chapter 11 bankruptcy protection Oct. 5, is scheduled to be auctioned Dec. 22, and its new owner — in a twist related to bankruptcy code and Friendly’s ownership history — could end up being its old owner: Sun Capital Partners Inc.
For Sun Capital, which is taking advantage of what’s known as a credit bid, the transaction could allow the Boca Raton, Fla.-based private-equity firm to retain control of Friendly, while shedding Friendly leases that it considers problematic and eliminating an as-of-yet-unknown amount of unsecured debt, including employee pension obligations.
The credit bid, part of U.S. Bankruptcy Code Section 363(k), permits a secured creditor with a valid lien to apply up to the full amount of the debt it holds as part of an asset bid package. Congress adopted the code section as a way for secured creditors to prevent a bankruptcy sale of their collateral, free and clear of its lien price. Credit bids are increasingly common, according to attorney Boris I. Mankovetskiy of Sills Cummis & Gross P.C., which has offices in New Jersey and New York.
“With the reduction of capital sources during the recent economic downturn, expedited Section 363 sales have become an important alternative to traditional Chapter 11 reorganizations,” Mankovetskiy wrote in a recent article in The Metropolitan Corporate Counsel, a publication aimed at in-house counsel. “As a result, credit bidding has been elevated to the forefront of defensive strategies for traditional lenders and offensive strategies of the private-fund community focused on distressed investment.”
In the case of Friendly, Sundae Group Holdings I LLC, an affiliate of Sun Capital, holds a $267.7 million promissory note from Friendly and its subsidiaries, tied to substantially all of the borrowers’ assets. According to court documents, Sundae Group Holdings I is second in line among secured debt holders behind first-lien senior secured holder Wells Fargo Capital Finance Inc., which is owed $21.5 million for a revolving credit facility.
Under a bankruptcy-court-approved agreement, another Sun affiliate, Sundae Group Holdings II, is offering a combination of cash and debt forgiveness on behalf of Sundae Group Holdings I, with a total value of $75 million, to start the bidding for the assets of Friendly Ice Cream Corp. and subsidiaries, including Friendly’s Restaurants Franchise LLC. Those assets include approximately 194 company restaurants, a franchising system covering 230 locations and ice cream manufacturing facilities to supply Friendly’s restaurants and retail customers.
Additional bids, if any, are due Dec. 20 and require a $5 million good-faith deposit, according to the court-approved bid process. An auction among any competing bidders is to be held Dec. 22 in New York.
To better the initial Sundae Group Holdings II package, a successful outside bidder must offer at least $75.5 million in cash, as counterbids must be made in $500,000 increments. The approved bidding procedure also requires that a successful outside bidder repay Sundae Group Holdings II for its costs in developing the initial bid, up to $1 million, and that any objections to the auction be filed with the court by Dec. 27, in advance of a hearing to finalize the asset sale set for Dec. 29.
Blaming depressed sales and rising commodity costs for foiling efforts to service debt and comply with lending covenants, Friendly said Oct. 5 it had closed 63 company restaurants and filed for Chapter 11 bankruptcy protection from creditors in U.S. Bankruptcy Court in Wilmington, Del. In court filings it estimated total assets of from $100 million to $500 million and liabilities of from $100 million to $500 million.
The company’s bankruptcy came approximately four years after Sun affiliate Freeze Operations Holding Corp. acquired then-publicly traded Friendly Ice Cream in a leveraged going-private transaction for $15.50 per share, or $395 million, court documents said. Sun Capital pledged $126.4 million in connection with the merger, Friendly officials said prior to the leveraged transaction.
At the time of the 2007 sale to Sun, Friendly already carried about $274 million in long-term debt and other liabilities and pension obligations, while generating about $530 million in annual revenue. It reported net income of $4.9 million in fiscal 2006 and net losses of $27.3 million and $3.4 million in fiscal 2005 and 2004, respectively.
Following the going-private deal, a Sun affiliate provided $100 million to Friendly in exchange for a secured promissory note, the principal amount of which was subsequently increased to $146 million and its terms modified from a floating rate to a flat rate of 12 percent interest, court filings said.
The debt owed by Friendly Ice Cream. under that promissory note had climbed to $267.7 million by the time the family-dining chain operator filed for bankruptcy. It represents the amount against which Sundae Group Holdings II will apply bid credits during an upcoming auction, or to cover the non-cash requirements of the preliminary asset purchase agreement that will stick if no other bidders surface.
Contact Alan J. Liddle at [email protected] .