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Uno, Sbarro draw credit downgrades, warnings about debt

New York Debt continues to be a four-letter word for the restaurant industry.

Standard & Poor’s Ratings Services lowered the corporate credit ratings of Uno Restaurant Holdings Corp. and Sbarro Inc. on Tuesday, saying both companies could soon breach debt covenants.

At Uno, the operator or franchisor of more than 200 Uno Chicago Grill restaurants, the decision to hold off on a twice-yearly interest payment due Friday triggered the ratings cut.

Chief executive Frank Guidara said Uno will indeed skip that payment and use a 30-day grace period to present a new capital structure to bond holders. He said the company does not face a liquidity issue and is looking to recapitalize while the casual-dining chain’s financial performance is strong.

“We are recapitalizing to free up a lot of debt,” Guidara said in an interview late Tuesday. “We’re doing this from a position of strength.”

In recent months talk of debt restructuring often has been followed by either bankruptcy filings or more expensive capital structures. The parent companies to chains including Ryan’s Steakhouse, Old Country Buffet, Village Inn and Bakers Square — and most recently the company-run portions of Bennigan’s and Steak and Ale — have all filed for bankruptcy. Some companies, including Ruby Tuesday Inc. and Perkins & Marie Callender’s Inc., have been able to successfully restructure debt, although at a higher cost of capital.

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 that its earnings before interest, tax, depreciation and amortization, or EBITDA, beat year-ago numbers.

“We just spoke to our bondholders this morning,” he said. “They are happy with where we are … 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 reflects a negative outlook by 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 that has impeded growth,” 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 Sbarro, which operates or franchises 1,064 Italian quick-service restaurants, ratings on the company’s notes, $183 million loan and $25 million credit facility all were lowered by the S&P Tuesday.

“The downgrade reflects the growing possibility that Sbarro will breach financial covenants … 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 B- and 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 the time this story was filed for posting.

Sbarro reported last week 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 $5.0 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.

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