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DIP lenders to own Back Yard Burgers

by Jamie Mason  |  Published November 2, 2012 at 2:35 PM
Back Yard Burgers Inc. has cooked up a reorganization plan that would give the quick-service restaurant chain's debtor-in-possession lenders all of its reorganized equity in exchange for the financing.

Judge Peter J. Walsh of the U.S. Bankruptcy Court for the District of Delaware in Wilmington will consider approval of the plan's disclosure statement on Dec. 5. Under the plan, filed Oct. 31, Nashville-based Back Yard Burgers would swap its $2.9 million DIP loan from its major equity holders, Pharos Capital Partners II LP and Pharos Capital Partners II-A LP, for 100% of the debtor's reorganized stock. The equity holders are affiliates of Dallas private equity firm Pharos Capital Group LLC.

The chain received interim access to use $700,000 of the DIP loan on Oct. 19. The final DIP and cash collateral hearing is scheduled for Nov. 8.

Meanwhile, holders of Back Yard Burgers' senior secured prepetition debt would receive a restructured senior secured note. Back Yard Burgers owes more than $8.87 million to an affiliate of Birmingham, Ala., alternative investment management firm Harbert Management Corp. The prepetition debt was set to mature on Nov. 5, 2013, and was priced at 17% per annum.

The restructured $6 million senior secured note would be priced at 5% per annum from the plan's effective date until Jan. 31, 2014. After that, pricing would increase to 8.5% per annum. It was unclear from court filings when the note would mature.

Under the plan, Back Yard Burgers would repay its administrative and other priority claims in full in cash on the plan's effective date, while priority tax claims would be repaid in full over a period of five years. Other priority claims would be reinstated with the reorganized company or paid in full in cash. General unsecured creditors and prepetition equity holders would be wiped out.

The chain filed for Chapter 11 on Oct. 17, with subsidiaries BYB Properties Inc., Nashville BYB LLC and Little Rock Back Yard Burgers Inc. The cases are being jointly administered. The debtor, which has 89 locations mainly in the Southeast and Midwest, owns 25 restaurants and has an additional 64 franchised locations.

Back Yard Burgers blamed its bankruptcy filing on the downturn in the economy and high operating costs, which left it unprofitable. Specifically, the debtor has been affected by declining restaurant sales, increased commodity costs and exorbitant lease rates. The company's liquidity was further constrained by the high interest rate on its secured debt, which prevented Back Yard Burgers from meeting debt service requirements, court filings said.

Finally, the chain faulted frequent management turnover and the resulting lack of leadership needed to address its problems. The debtor said that leadership void actually aggravated it woes because staff was reduced to levels that detracted its customers from their dining experience.Also hurting Back Yard Burgers was the fact that some of the chain's restaurants also worked out their own terms with suppliers and ended up paying different prices for items.

For the first eight months of 2012, the debtor had $18.4 million in revenue and $2.4 million in negative Ebitda. Roughly $1.3 million of its revenue during the period came from franchisee fees. Back Yard Burgers has been relying on funding from its major equity holders, Pharos Capital Partners II  and Pharos Capital Partners II-A, which have provided more than $14 million to the company.

"While Pharos has supported the debtors' business with substantial cash infusions and has provided the debtors an opportunity to develop a restructuring plan, Pharos has indicated that it cannot indefinitely fund the debtors' losses," court filings said.

Before filing for Chapter 11, Back Yard Burgers closed 19 of its company-owned locations because of underperformance and prohibitive costs.

Back Yard Burgers restaurants operate in Alabama, Arkansas, Georgia, Florida, Illinois, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Pennsylvania, South Carolina and Tennessee. The company has 512 employees.

The company  began its operations with a single restaurant in Cleveland, Miss., in 1987. Pharos led a group of investors that purchased the debtor's equity on June 10, 2007. As of the petition date, Pharos held 78% of the debtor's nonbankrupt parent, BBAC LLC.

The company offers Black Angus hamburgers and chicken grilled over charcoal to provide flavors similar to those delivered by neighborhood backyard grills. The debtor also offers chicken sandwiches, turkey burgers, hot dogs, salads, sides and desserts at its restaurants.

Debtor counsel is Nancy A. Mitchell and Maria J. DiConza of Greenberg Traurig LLP.
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