On October 4, 2011, Real Mex Restaurants, Inc. (“Real Mex”) filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. In addition to Real Max, several of the company’s subsidiaries also filed for bankruptcy protection. These subsidiaries include Acapulco Restaurants, Inc., Chevys Restaurants, LLC, El Torito Restaurants, Inc., and El Paso Cantina, Inc. (collectively with Real Mex, the “Debtors”). This post will provide a brief summary of Real Mex’s business operations, factors that lead to the company’s bankruptcy filing, as well as the company’s objectives now that it is in bankruptcy. As I often do, much of the information provided in this post comes from the Declaration of Debtors’ CFO in Support of First Day Motions (the “Declaration” or “Decl.”).
Real Mex describes itself as the “largest full service Mexican casual dining restaurant chain operator in the United States in terms of number of restaurants.” Decl. at *3. As of June of 2011, Real Mex operated 178 restaurants, the vast majority of which are in California. In addition to operating restaurants, Real Mex also franchises or licenses 30 restaurants in 10 states and two foreign countries. The company’s restaurants are spread all over the U.S., with stores in Washington state, New York, Florida and Louisiana (among others). Id.
Real Mex operates four primary brands of restaurant – El Torito, El Torito Grill, Chevys Fresh Mex and Acapulco Mexican Restaurant. The first El Torito restaurant opened in 1954, whereas the first Acapulco restaurant started in 1960. The Chevys restaurants came along in 1986. In 1970, Real Mex Foods, Inc., began manufacturing and distributing Mexican foods to the Debtors’ restaurants and general public. According to the Debtors, the internal manufacture and distribution of foods improves the company’s purchasing power and food quality. Decl. at *4-5. At the time of filing for bankruptcy, Real Mex employed approximately 11,000 full and part-time employees. Id. at 5.
Events Leading to Bankruptcy
Over the last couple of years, we have written about several restaurant chains filing for bankruptcy. Like the restaurants that filed bankruptcy before it, Real Mex attributes its bankruptcy filing to the overall drop in consumer discretionary spending that began in 2008 and continues to the present. Decl. at *10. Fewer customers are coming to Real Mex’s restaurants, which in turn reduces overall sales. In 2008, the company experienced annual revenues of $553 million. By 2009, revenues dropped to $500 million. By 2010, revenues dropped again, this time to $478 million. Decl. at *11.
Although Real Mex blames the recession for its drop in revenues, the company also points to specific factors that have negatively affected profitability. Many of Debtors’ restaurants are located in states that have disproportionately higher unemployment. Decl. at *11. Furthermore, the company has experienced higher commodity prices for its food ingredients. Id.
Objectives in Bankruptcy
In July of this year, Real Mex notified its lenders that it was in default of certain covenants in its loan agreements. During that same month, Real Mex was able to reach a short term agreement with its lenders whereby they agreed to waive certain covenant defaults. Decl. at *13. In August and September, Real Mex entered negotiations with its lenders regarding a restructuring under chapter 11. Once it was clear that the company could not reach a consensual agreement with all of its lenders regarding a restructuring, Real Mex decided to file for bankruptcy and seek a sale of substantially all of the company’s assets under section 363 of the Bankruptcy Code. Id. at 14.
The Real Mex bankruptcy proceeding is before the Honorable Brendan L. Shannon. Real Mex is represented by the law firms Milbank, Tweed, Hadley & McCloy LLP and Pachulski Stang Ziehl & Jones LLP. A copy of Real Mex’s Declaration filed with the Bankruptcy Court is available here for review.