PizzaExpress bondholders have warned the restaurant chain that its future is at risk, urging its Chinese owners to work with them on a financial restructuring.
A group of investors who own almost 70 per cent of the £465m of senior secured bonds told the board they were willing to provide extra money to secure the business, said two people with familiar with the situation.
Their letter asked management to move quickly to restructure the group’s debt-laden balance sheet.
Analysts from S&P on Monday said that a “distressed exchange or a debt restructuring appears to be inevitable within six months”, downgrading the pizza chain’s debt given “a material refinancing risk on its capital structure, reflected by unsustainable leverage levels and negligible cash flow generation”.
One person familiar with the investors’ thinking said bondholders would be open to a debt-for-equity restructuring in which they could swap their loans for ownership of the business while putting in new money to help improve the group’s financial situation.
PizzaExpress, among the UK’s oldest dining chains, was bought by Chinese private equity firm Hony Capital in a £900m leveraged buyout in 2014 at a time when oversupply in the casual dining market was beginning to hit margins.
The fate of PizzaExpress comes at a particularly sensitive time for Hony, which also invested $150m in the Chinese subsidiary of troubled shared-office provider WeWork.
The restaurant chain’s £1.1bn in net debt easily exceeds estimates of its equity value.
S&P said that in a 2020 “simulated default” scenario it projected PizzaExpress’s gross enterprise value at £342m.
According to the rating agency, the group ended the third quarter with £20m of cash on its balance sheet, from £37m at the end of June and after a £24m interest payment in August.
Perella Weinberg Partners and Latham & Watkins are advising the bondholder group. Houlihan Lokey and Kirkland & Ellis are advising PizzaExpress.
PizzaExpress declined to comment. Hony Capital could not be reached for comment. A representative for the bondholder group declined to comment.
Hony said on Wednesday that it wanted to buy £80m of the chain’s unsecured junior debt at a 20-40 per cent discount to the face value of the bonds. In the tender document, Hony said it already controlled about £22.7m of the junior debt, which could leave the group with just over 50 per cent of the unsecured bonds.
The company’s £465m of secured bonds mature in August 2021, and the unsecured £200m in August 2022.
Hony’s potential ownership of just over half of the junior debt has caused analysts and investors to question whether it could turn these bonds into senior debt, or assign the debt to a key part of the business, such as the brand, which would secure greater control over the future of the company.
Investors are also concerned that Hony is investing in the debt, rather than the company’s operations, said one person familiar with their thinking, adding that the investors would scrutinise the board’s decisions for any conflicts of interest.
PizzaExpress’s board, with the exception of chief financial officer Andy Pellington, are affiliated to Hony Capital or the company’s other major shareholders Jinjiang Group and Bank of China.
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