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Shrinking Quiznos Seeks to Restructure Debt Again, Bankruptcy Ahead?

A shuttered Quiznos reopens under new owners
A Quiznos franchise opens under new owner. Photo/bmm 2008

NEW YORK CITY—Quiznos' former creditor now turned majority shareholder, Avenue Capital, has recruited the A-list law firm Akin Gump to pave a legal way for the imploding sandwich franchisor to unbury itself from a mountain of debt. New York City-based Debtwire reports that the franchising firm's cash balance went from $60 million a year ago to $30M at the end of the third quarter in 2012 to now $14.6 million at the end of the first quarter in 2013. Its withering cash compared to an already largely illiquid second lien due 2017 has analysts worried about the company's yet again weakened ability to pay its sizable debts.

"Last month, Quiznos reported an 11% decline in same store sales for the month of May as its restaurant count dropped to 2,382 from 2,577 at the start of the year," reports Debtwire, a provider of information and analysis on the distressed debt market.

Franchisee insiders think those official global numbers might be high. They estimate that there are actually 1,600 - 1,700 restaurants in the United States, including the few airport and non-traditional locations. "The U.S. system alone is losing over 30 to 60 stores a month," said one insider.

"In April, monthly sales fell 5.8%, and for 1Q13 ended in March same store sales suffered a 13.5% dive," Debtwire continues in its report to subscribers. "Quiznos cut guidance for expected FY13 comparable sales during a 31 May investor call. In its latest estimates, the company now anticipates reporting negative-to-flat comparable sales this year, versus prior projections that called for flat annual sales."

Restaurant unit economic analyst John Gordon of San Diego-based Pacific Management Consulting Group observes: "Its dwindling comparable sales is a product of Quiznos' system decline in the United States and its continued market share loss." He estimates that Quiznos' steep same store sales slump imperils both existing Quiznos franchisee operators and the debt laden franchisor. The falling trend is alarming to Gordon because this year's reported 2013 same store sales slump was already based on last year's dismal average unit volume for stores in the United States. "Quiznos franchisor royalties will shrink even more as franchisees' cash flows become increasingly negative," estimates the analyst.

Debtwire, a subsidiary of the Financial Times Group, also reports: "For 1Q13, the fast food chain generated $17 million of EBITDA [Earnings Before Income Tax, Depreciation and Amortization], bringing the LTM [last twelve months] level to $75 million, and pinning its leverage at 8.9x based on $664 million in total debt. For comparison, leverage was 5.9x at the end of 1Q12, its first post-restructuring quarter."

Franchising firm Quiznos' EBITDA of only $75 million worries Gordon. "That will put Quiznos in danger of breaching its loan covenants on the remaining $600M in debt," he declares. "Avenue has retained Akin to begin working with the existing debt holders, to work out yet more debt reductions."

Gordon thinks that the franchisor will need to trim its current obligations or face bankruptcy. "If the debt noteholders are not willing to cut what Quiznos owes them, then Quiznos likely will end up filing Chapter 11," he states.

Despite the franchisor's deep troubles of possible financial insolvency, Quiznos has put on a happy face for the public and potential franchisee candidates. It announced last week that its first two restaurants in Russia had opened and that it would love to see its new licensee open 500 restaurants there in the next 10 years. But in regard to the franchisor's harsh reality at home, Quiznos is mum. Debtwire reports, "Representatives from Quiznos and Avenue did not return requests for comment. Calls to Akin were not returned."

UPDATE, Aug 6, 2013, 11:30 a.m — Quiznos' CEO Stuart Matthis told franchisees in a network wide phone conference that there was no truth to this report on Financial Times' DebtWire and Blue MauMau. He explained that the company has simply hooked up with a new law firm, Akin Gump, to strengthen its legal representation. He said that the company was on solid financial ground.

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