Mon 05/20/2024 16:24 PM
Share this article:
Relevant Documents:
Voluntary Petition
List of Largest Unsecured Creditors
Press Release
First Day Declaration
Case Management Summary
Restructuring Support Agreement
DIP Financing Motion
Bid Procedures Motion
First Day Hearing Agenda
Red Lobster is a $2 billion revenue seafood restaurant chain
Company attributes filing to weak sales leading to liquidity issues caused by inflation, managerial “missteps” and an unfavorable supplier contract with equity sponsor and majority owner Thai Union
Case premised on restructuring support agreement with prepetition term loan lenders contemplating DIP financing and a stalking horse credit bid of outstanding DIP claims for substantially all assets
Existing term lenders, led by Fortress as agent, to provide DIP financing of $275 million including $100 million new-money and $175 million rollup

Red Lobster, an Orlando, Fla.-based chain of seafood restaurants with 551 restaurants in the United States, 27 in Canada and 27 franchised locations in Mexico, Ecuador, Japan and Thailand, filed for chapter 11 protection late Sunday night, May 19, with several affiliates in the Bankruptcy Court for the Middle District of Florida.

The cases are premised on a restructuring support agreement with the debtors’ prepetition term loan lenders, of which Fortress Credit Corp. is agent. The RSA provides the debtors with $275 million in DIP financing consisting of $100 million in new-money and a $175 million rollup. The RSA also contemplates a newly formed entity by the prepetition term loan lenders, RL Purchaser LLC, to serve as stalking horse bidder for the sale of all assets. The stalking horse bid is a credit bid of 100% of the DIP loans, assumption of specified liabilities and excluded cash that would remain with the sellers at closing. The debtors are aiming for a 75-day sale process.

The first day declaration of Red Lobster CEO Jonathan Tibus, a managing director at Alvarez & Marsal, says that prior to filing, the debtors undertook efforts to right-size the company’s restaurant footprint, and on May 13 it determined to close and vacate 93 nonperforming stores that were deemed “financially burdensome.”

The company reports $1 billion to $10 billion in both assets and liabilities. The debtors’ prepetition capital structure is shown below:

The outstanding obligations under the prepetition ABL facility are secured by substantially all of the debtors assets, including certain cash collateral accounts held by Wells Fargo.

Wells Fargo has issued $29.3 million of letters of credit which remain outstanding as of the petition date. In addition, there are approximately $1.1 million of outstanding obligations in connection with a commercial card agreement (or p-card agreement) between Wells Fargo and the debtors. According to the DIP motion, the debtors entered into the commercial card agreement in connection with the ABL facility as a “Bank Product,” and the obligations under the commercial card agreement of Red Lobster Management, or RLM, to Wells Fargo are bank product obligations under the ABL facility and are secured by funds on deposit in one or more cash collateral accounts held in the name of RLM at Wells Fargo.

Wells Fargo has a senior lien on certain current assets (e.g., cash, cash accounts, inventory and credit card receivables), and the prepetition term loan agent has a senior lien on all other assets of the debtors.

The DIP financing also contemplates a payoff pursuant to a payoff letter of approximately $15.5 million in the aggregate of the ABL facility, including $250,000 to satisfy fees, costs and expenses, $14.1 million to cash collateralize letters of credit obligations and $1.1 million to cash collateralize bank product obligations.

The outstanding obligations under the prepetition term loan credit agreement are secured by substantially all of the debtors’ assets.

Fortress Credit Corp. is the administrative agent for the term loan, and Wells Fargo is the administrative agent for the ABL facility. There are no loans outstanding under the ABL facility, which has an aggregate commitment of up to $100 million with a $40 million sublimit for letters of credit.

Fortress Investment Group is the largest holder of the prepetition term loans. A link to the CLO database is HERE.

As of the petition date, the debtors hold approximately $14.7 million cash held in bank accounts subject to a control agreement in favor of the prepetition secured parties and constitutes cash collateral. According to the cash management motion, $13.1 million is operating cash in bank accounts to which the debtors have immediate access. There is additional cash held in restaurant depository accounts and liquor accounts that are not immediately available to the debtors.

Signatories to the RSA are Fortress Credit Opportunities XVII CLO Ltd., FLF II GMS Holdings Finance LP, FLF II MA-CRPTF Holdings Finance LP, FLF I Securities LP, FLF II Securities LP, FLF II Holdings Finance LP, Fortress Lending I Holdings LP, Fortress Lending II Holdings LP, Fortress Lending Fund II MA-CRPTF LP, Drawbridge Special Opportunities Fund LP, DBDB Funding LLC, BTC Holdings Fund II LLC, BTC Holdings SBAF Fund LLC, BTC Holdings KRS Fund LLC, BTC Offshore Holdings Fund II-D LLC, BTC Holdings SC Fund LLC, Blue Torch Credit Opportunities Fund II LP, Blue Torch Offshore Credit Opportunities Master Fund II LP, TCW WV Financing LLC, TCW Skyline Lending LP, TCW Brazos Fund LLC, TCW DL VII Financing LLC, TCW Direct Lending Structured Solutions 2019 LLC, TMD-DL Holdings LLC, Reliance Standard Life Insurance Co., Philadelphia Indemnity Insurance Co. and Safety National Casualty Corp.

The debtors’ organization structure is shown below:
(Click HERE to enlarge.)

Prior to the petition date, the debtors were unable to obtain additional funds from equity sponsor Thai Union, which is the majority holder of the debtors’ equity interests. Likewise, negotiations to create a new equity structure with Thai Union retaining a minority interest also failed. Without financial support from Thai Union, the debtors’ prepetition term loan lenders were not willing to make any further loans outside of a chapter 11 process, the declaration says.

Thai Union indirectly holds approximately 47% of common equity interests and 100% of the preferred equity units, and Seafood Alliance indirectly holds approximately 38% of the common equity interests. The remaining common equity interests are indirectly held by former Red Lobster management in two entities: RL Management Investors LLC and, indirectly, RL Management Holdings LLC.

The first day declaration discusses the company’s various “missteps,” detailing former CEO Paul Kenny’s decision to add the “Ultimate Endless Shrimp” promotion as a permanent item on the menu, despite “significant pushback” from other members of management. Tibus says that this created operational and financial issues, costing $11 million and “saddling” Red Lobster with “burdensome supply obligations, particularly with its equity sponsor Thai Union.” The debtors are “currently investigating the circumstances around these decisions” and others by Thai Union and Kenny related to the outsized control Thai Union exerted as equity sponsor, 100% owner of Red Lobster Master Holdings and a large-scale shrimp supplier to the company.

The debtors also say that they intend to file an application for foreign recognition of the chapter 11 cases in Canada under Part IV of the Companies Creditors Arrangement Act, or CCAA.

The first day hearing is set for tomorrow, Tuesday, May 21 at 1:30 p.m. ET.

The case has been assigned to Judge Grace E. Robson (case No. 24-02486). The debtors are represented by King & Spalding as counsel; Berger Singerman as Florida co-counsel; Blake, Cassels & Graydon as local Canadian counsel; Hilco Corporate Finance as lead investment banker; and Alvarez & Marsal North America LLC to provide a CEO (Jonathan Tibus), chief restructuring officer (Nicholas Haughey) and other personnel. Epiq is claims and noticing agent, and Keen-Summit Capital Partners is real estate advisor. Fortress is represented by Proskauer Rose.

Background / Events Leading to Bankruptcy Filing

Red Lobster is a seafood restaurant chain, founded in 1968 and headquartered in Orlando, Fla. The chain has 551 U.S. restaurants in 44 states and 27 restaurants in Canada, plus 27 franchised locations outside the U.S. including in Mexico, Ecuador, Japan and Thailand. Red Lobster describes itself as the “the largest” casual dining seafood chain in the U.S., accounting for more than half of all casual dining seafood chain locations. The company purchases 20% of all North American lobster tails and 16% of all rock lobsters sold worldwide, according to the first day declaration. The debtors have 36,000 employees.

After expanding in the U.S., Red Lobster moved into Canada in 1983. In 1995, General Mills spun off its restaurant division as Darden Restaurants Inc., and in May 2014, Darden sold Red Lobster in a leveraged buyout to Golden Gate Capital. In 2016, Thai Union Group Public Co. acquired 49% of Red Lobster’s outstanding equity and subsequently acquired the remaining equity in 2020 as part of a group of investors and former Red Lobster managers (the Seafood Alliance).

The Red Lobster debtors’ interim CEO Tibus paints a dire picture of the Red Lobster debtors’ financial position in the year prior to the petition filing. In the 12 months prepetition, the restaurant guest count was 30% below 2019 levels, net sales “slowed materially,” and EBITDA fell by more than 60%, resulting in a net loss of $76 million.

As sales struggled, expenses ballooned: The debtors faced significant wage and inflationary pressures as half of states increased minimum wage in 2024 and a majority of stores had materially above-market rent expenses.

In addition, because the debtors transitioned to a vendor-managed inventory program, they had less inventory available to post as collateral under the prepetition ABL facility, and that in turn required them to pay down $27 million in ABL loans because of a lack of collateral.

The Red Lobster debtors assert that these financial struggles were a direct result of or compounded by former management’s missteps and, potentially, wrongdoing. Most famously, in May 2023, acting CEO Paul Kenny decided to permanently add an “Ultimate Endless Shrimp” menu item; this promotion had previously been for a limited time only. The result was an $11 million loss that accelerated Red Lobster’s financial deterioration.

In addition, Thai Union, as well as certain other investors and former members of Red Lobster’s management team (the Seafood Alliance), which together are the debtors’ majority shareholders, allegedly interfered with the debtors’ operations to their benefit and Red Lobster’s detriment. Tibus asserts that Thai Union “exercised an outsized influence on the Company’s shrimp purchasing” and that Kenny awarded certain shrimp supplier contracts to Thai Union outside the normal bid process, unnecessarily driving up Red Lobster’s supplier costs.

In December 2023, the prepetition term lender group led by Fortress declared events of default and replaced Kenny and all other existing managers and directors. Fortress subsequently engaged with Thai Union to create a new equity structure whereby the prepetition term loan lenders would acquire approximately 80% of the restructured company and Thai Union would retain a minority equity interest. These negotiations were ultimately unsuccessful; Kenny’s successor as CEO, Horace Dawson, decided to retire, and Tibus assumed CEO responsibilities and continued restructuring Red Lobster’s operations.

Among other things, Tibus standardized store operations, simplified the menu and closed 93 stores. Red Lobster also retained investment banker Hilco to commence an extensive out-of-court marketing and sale process.

However, in part because Thai Union refused to extend additional financing, the Red Lobster debtors pivoted to a chapter 11 filing, with the Fortress prepetition term loan lenders serving as the stalking horse bidder for the sale of substantially all of the debtors’ assets as a going concern. Pursuant to the RSA, the prepetition term loan lender also agreed to extend DIP financing to fund the administration of the bankruptcy cases.

The debtors' largest unsecured creditors are as follows:
10 Largest Unsecured Creditors
 Creditor Location Claim Type Amount 
Kenneth O Lester Co. Inc. Richmond, Va. Trade $   24,403,926
Rubin Postaer and Associates Santa Monica, Calif. Trade 13,375,603
The Wasserstrom Co. Columbus, Ohio Trade 1,598,250
Gordon Food Service Canada Ltd. Toronto Trade 1,200,311
IPSOS Insight LLC New York Trade 1,051,719
Merkle Inc. Columbia, Md. Trade 837,255
Doordash Inc. San Francisco Trade 732,984
Paint Folks Hackensack, N.J. Trade 453,390
Dinova Inc. Johns Creek, Ga. Trade 450,059
Presto Automation Inc. San Carlos, Calif. Trade 368,181

The case representatives are as follows:
 Role Name Firm Location
Debtors' Co-Counsel W. Austin Jowers

Jeffrey R. Dutson

Sarah L. Primrose

Christopher K. Coleman

Brooke L. Bean

Taeyeong Kim
King & Spalding Atlanta
Michael Fishel Houston
Debtors' Co-Counsel Paul Steven Singerman Berger Singerman Miami
Nicolette C. Vilmos Orlando, Fla.
Debtors' Canadian Counsel NA Blake, Cassels
& Graydon
Debtors' CEO and CRO Jonathan Tibus (CEO)

Nicholas Haughey (CRO)
Alvarez & Marsal Atlanta
Debtors' Investment Banker Teri Stratton Hilco Corporate
Debtors' Real Estate Advisor NA Keen-Summit
Capital Partners
Melville, N.Y.
Co-Counsel to Fortress
Credit Group, as the
DIP Agent
Charles A. Dale Proskauer Rose Boston
Megan R. Volin

Dylan J. Marker

Michael M. Mezzacappa
New York
Co-Counsel to Fortress 
Credit Group, as the
DIP Agent
Lara Roeske Fernandez Trenam Law Tampa, Fla.
Co-Counsel to Prepetition
ABL Agent
Randall L. Klein Goldberg Kohn Chicago
Co-Counsel to Prepetition
ABL Agent
Eric S. Golden Burr & Forman Orlando, Fla.
U.S. Trustee Scott E. Bomkamp Office of the
U.S. Trustee
Orlando, Fla.
Debtors’ Claims Agent Kate Mailloux Epiq New York

DIP Financing Motion / Cash Collateral Motion

The DIP facility consists of $100 million of new-money term loans and a $175 million rollup of prepetition term loan obligations, with $40 million of new-money DIP loans to be available on an interim basis. Prepetition term loan obligations would be rolled up on a 1.75:1 ratio with draws on the new-money term loans. Fortress Credit Corp. is the DIP agent.

The DIP financing bears interest at the “Reference Rate” plus 9.5% for reference rate loans and SOFR+10.5% for SOFR loans for the default rate, and matures on the earlier of Sept. 16 and the plan effective date.

To secure the DIP financing, the debtors propose to grant liens on all the debtors’ assets, including unencumbered real property owned by Party Red Lobster Canada Inc. located at 67 King George Rd. in Brantford, Ontario, but would not include real property leases (but would include all proceeds of such leases) if such leases prohibit attachment of the DIP liens. Subject to entry of the final order, the DIP liens would also attach to the proceeds of avoidance actions. The DIP liens would be subject only to the carve-out, permitted prior liens and the administration charge against the collateral Red Lobster Management LLC, Red Lobster Hospitality LLC and Red Lobster Canada Inc., which are subject to proceedings under the Companies’ Creditors Arrangement Act Proceedings.

The facility includes an upfront fee equal to 1% of the aggregate principal amount of the new-money DIP term loans, and exit fee equal to 3% of the aggregate principal amount of the new-money DIP term loans, and a $100,000 DIP agent fee.

In support of the proposed DIP financing, the debtors filed the declaration of Chief Restructuring Officer Nicholas Haughey, who states that the debtors require $100 million of additional liquidity to fund the cases, “inclusive of the operating funding needs through the low revenue generation season.” Haughey says that the prepetition ABL lenders are “significantly oversecured” based on the debtors’ borrowing base as of May 12. The debtors propose a payoff of approximately $15.5 million in the aggregate, which Haughey says “is significantly less than the Prepetition ABL Secured Parties’ total first priority lien collateral position of at least $55.3 million (exclusive of cash already held by the Prepetition ABL Agent collateralizing the Letters of Credit Obligations).” The first-priority collateral position, the declaration continues, “includes (i) cash and cash equivalents subject to control agreements constituting Cash Collateral of approximately $14.7 million and (ii) accounts receivable and credit card receivables of approximately $40.6 million.” The ABL would be paid from its collateral.

The debtors also submitted the declaration of Teri Stratton of Hilco Corporate Finance, who states that the debtors contacted 14 third parties to provide DIP financing, but only one signed a confidentiality agreement, and none provided a term sheet or indication of interest.

The company proposes the following adequate protection to the prepetition term lenders: replacement liens, allowed superpriority administrative expense claims and monthly payment of professional fees, PIK interest at the default rate and the right to credit-bid.

In addition, subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).

The post-termination carve-out is (i) $750,000 for debtors’ professional fees and (ii) $150,000 for any official committee of unsecured creditors’ professional fees.

The proposed budget for the use of the DIP facility is HERE.

Milestones in the DIP credit agreement contemplate the following:
  • May 21: Entry of interim DIP financing order;
  • June 18: Entry of final DIP financing order; Entry of bidding procedures order;
  • July 23: Auction, if necessary;
  • July 29: Entry of sale order;
  • Aug. 2: Restructuring consummation deadline; and
  • Aug. 17: Extended restructuring consummation deadline if necessary for regulatory approvals.

The lien challenge deadline is the earlier of 60 days after the petition date and the bid deadline. The UCC lien investigation budget is $50,000.

Bid Procedures Motion

The debtors request approval of bid procedures for substantially all of their assets with the prepetition term lenders serving as stalking horse through newly formed entity RL Purchaser LLC run through Hilco Corporate Finance as investment banker.

The prepetition process spanned more than 230 parties, with engagement with substantive involvement with at least 170 parties. In May, the stalking horse offered DIP financing and a credit bid of substantially all of the debtors’ assets, resulting in the proposed $275 million DIP financing and going-concern credit bid.

The stalking horse bid is a credit bid of 100% of DIP obligations, assumption of certain liabilities and excluded cash. Excluded cash would be “(i) an amount sufficient to satisfy the estimated accrued professional fees and expenses of estate professionals as of the Closing Date that are included in the Carve-Out (as defined in the DIP Financing Agreement)), plus (ii) an amount sufficient to pay all administrative expenses that are accrued and unpaid as of the closing date that are otherwise provided for in the DIP Budget (as defined in the DIP Motion), plus (iii) $500,000 to be used by the Debtors to fund wind-down expenses, plus (iv) a commitment to fund amounts required to perform the Debtors’ obligations under the Transition Services Agreement, plus (v) unless otherwise paid by the Stalking Horse Bidder, an amount sufficient to pay PTO and vacation pay that may be triggered at the closing with respect to employees the Stalking Horse Bidder hires.”

Initial overbids are $2.5 million, and subsequent overbid increments would be announced at the auction. “No bidder or any other party shall be entitled to any termination or ‘break-up’ fee, expense reimbursement or any other bidding protections,” according to the bid procedures.

The proposed sale timeline is as follows:
  • July 12: Sale objection deadline;
  • July 18: Bid deadline;
  • July 23: Auction;
  • July 26: Post-auction objection deadline; and
  • July 29: Sale hearing.

Lease Rejection Motions

The debtors filed first omnibus (with proposed rejections listed HERE), second omnibus (with proposed rejections listed HERE), third omnibus (with proposed rejections listed HERE) and fourth omnibus (with rejections listed HERE) lease rejection motions.

A full list of the debtors’ leases is HERE, according to the case management summary. The debtors have 687 leased locations, of which 247 are in master leases and 440 individual property leases, according to the first day declaration, which adds that the company spent approximately $190.5 million in lease obligations in 2023, of which more than $64 million was spent on underperforming stores.

The debtors are utilizing Keen-Summit Capital Partners LLC as real estate advisor.

Other Motions

The debtors also filed various standard first day motions, including the following:
  • The debtors employ approximately 35,664 employees, 33,749 of whom are in the United States, and approximately 1,915 of whom are in Canada. About 2,274 of the U.S. employees are salaried employees, with the remainder being hourly employees. About 104 of the Canadian employees are paid on a salaried basis, and about 1,811 are paid on an hourly basis. In addition, the debtors utilize the services of 47 independent contractors who serve in corporate roles. The motion does not seek to make any payments to insiders.
Share this article:
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.
Thank you for signing up
for Weekly Insights!