California Pizza Kitchen: International Expansion Underway

Mea Culpa. We’ve not written about California Pizza Kitchen (CPK) – one of the more prominent casualties of the pandemic – in some time. The restaurant chain filed for bankruptcy back in 2020 with hundreds of millions of dollars of debt on the books, including $60mn from 8 BDCs. Then a great deal of the debt was converted to equity (which resulted in realized losses) and equity was granted to the lenders in compensation. More recently the company rid itself of its $177mn in post-bankruptcy debt.

This left, since IIIQ 2021, three BDCs with exposure to the rejigged CPK – all in the form of equity stakes. The BDCs involved are Great Elm (GECC); Capital Southwest (CSWC) and Monroe Capital (MRCC), with total exposure at cost of $15.6mn. The equity was received in the IVQ 2020 and has fluctuated in value every quarter since, along with the chain’s business prospects.

These equity valuations peaked in IIIQ 2021 when the three positions were valued at $13.3mn, a (15%) discount to the average cost. In the most recent IVQ 2021, the valuation dropped slightly, probably due to concerns about omicron or perhaps reflecting recent metrics. Nonetheless, the well regarded management of CPK have an aggressive expansion plan in place and just announced two international franchise agreements, and plans to open 7 restaurants overseas by year end 2022.

We can’t be sure, but there’s a good chance CPK’s equity could increase in value as a result of these and other actions, and the improving Covid situation. If so, the BDCs left with an equity stake might be able to recoup their initial pre-bankruptcy investment in full, or even better. GECC has the most to (re)gain, with a current value of $4.7mn; followed by MRCC with $3.7mn and CSWC at $2.3mn. We’ll be looking out for the latest values when BDC earnings season returns in late March/early April 2022.