On October 26, 2020 Mexican casual chain Rubio’s Restaurants Inc. filed for Chapter 11 bankruptcy protection in Delaware. However, the company has already negotiated a restructuring plan with its private equity sponsor Mill Road Capital and with its lender, funds managed by Golub Capital. A “debtor in possession facility” has already been negotiated and there is hope the chain will be in and out of bankruptcy within weeks. Still, 26 locations out of 150 are being permanently closed, which may explain why the trip through bankruptcy court was chosen.
The only BDC with exposure is Golub Capital BDC (GBDC), which holds close to $18mn in first lien debt and $0.45mn in preferred stock. In total Golub Capital related funds have $80mn plus in exposure to the pre-bankruptcy company and are advancing another $8mn in debt and equity going forward. Mill Road Capital is reportedly also making an equity contribution. This looks a partial debt for equity swap where Golub – through its funds – will increase its equity stake in Rubio’s in return for the additional funds and some debt forgiveness.
The debt outstanding at GBDC has been on non accrual since Covid-19 devastated the restaurant business in the IQ 2020. We downgraded the business from CCR 3 to CCR 5 at that time. Rubio’s is now added to the BDC Credit Reporter’s list of BDC-financed portfolio companies in bankruptcy, the fourth in October for those keeping score. GBDC has written down its debt by just shy of (50%) and the preferred is valued at zero. We expect that this presages what the realized loss might look like, which could be booked in the IVQ 2020: about ($10mn). There will be no impact on investment income as the debt has been non-performing. In fact, from early 2021 GBDC may begin to earn income on some $10mn of remaining debt and new proceeds.
As always in these situations where a BDC goes from lender to owner, how long the investment will last is unknowable. The BDC, though, has been involved with Rubio’s since 2010 when Mill Road fist bought the business. For all we know, the restaurant chain may yet be on the Golub books another decade from now.
This is an undeniable setback for GBDC and the amounts involved are material, although the final gain or loss will not be known for years. The BDC Credit Reporter would question why GBDC – or any other BDC lender -would invest in the restaurant business in the first place. Along with E&P production; energy services; bricks and mortar retail, eateries are a controversial choice from a credit standpoint as reflected on the many troubled companies we’ve mentioned on these places. In our day many lenders had the restaurant sector on their prohibited list.
Nonetheless, the ability and willingness of GBDC – along with the Golub organization – to step up to become an owner-lender might mitigate ultimate losses. Or make them worse once all the beans are counted. Time will tell us. In the interim, we expect to be writing about Rubio’s multiple more times in the years ahead as the proposed turnaround gets into gear.