Craftworks Parent LLC

3/3/20

In November 2018, four core casual dining restaurant brands were merged together when Centerbridge Partners LP — the owners of Old Chicago Pizza & Taproom, Gordon Biersch Brewery Restaurant and Rock Bottom Restaurant and Brewery (“Craftworks”) — purchased Logan’s Roadhouse.* At the time of the transaction, Craftworks had 189 corporate and franchise restaurants and Logan’s had 204. Craftworks had ‘17 revenue of $434.5mm and Logan’s had ‘17 revenue of $462.4mm. Fast forward 16 months and the combined entity is now in bankruptcy court.

The TN-based debtors currently operate or franchise 330 locations (⬇️63) and generated revenue of $720mm of revenue in 2019 (⬇️$176.9mm). It’s safe to say that this performance is not what Centerbridge had in mind when it did the transaction. Ahhhhh…synergies.

The debt coming out of the transaction shoulders much of the blame:

…the Debtors have been negatively impacted by an overleveraged capital structure and low levels of liquidity that dates back to their acquisition of Logan’s Roadhouse in November 2018.

This is what that debt looks like:

Of course, the debt is only part of the story. The debtors also blame their poor performance on rising wages, increased competition, third-party delivery platforms, and high rent. You know, the usual suspects in the casual dining space. Adding to the debtors’ misery was the fact that the integration of the two companies didn’t exactly go as planned. Per the debtors:

Since the closing of the Logan’s Acquisition, the Debtors’ business has been hampered by an overleveraged balance and lack of sufficient liquidity to fund their operations, including necessary capital expenditures and investment in their restaurants. These issues were compounded by other internal and external factors, such as underperforming stores, unfavorable leases, redundant selling, general and administrative expenses and a general decline in same-store traffic and sales. The primary reasons for the underperformance were lower topline sales and deterioration in gross margin.

“Redundant selling” isn’t exactly the kind of synergies purchasers hope for. That said, there were synergistic benefits. The post-transaction debtors enjoyed approximately $12mm of labor cost reductions, $5mm of operating expense reductions and $4mm of corporate general and administrative expense reductions. The private equity operational model illustrated, ladies and gentlemen.

Except this didn’t offset optimistic modeling. Per the debtors:

The Logan’s Acquisition transaction model forecasted fiscal year 2019 revenue based on a same-store sales growth rate of 1.5% with a 72.5% gross margin; however, actual same-store sales for fiscal year 2019 declined by approximately 1.0%, resulting in a total volume-driven gross margin loss of approximately $27.0 million. In addition, occupancy expense was under-forecasted by approximately $2.0 million.

Last we checked, $29mm > $21mm. 🤓

Because of all of this, the debtors were unable to make interest payments under the pre-petition first lien credit agreement. This put Fortress in the driver’s seat. And Fortress is seizing the opportunity. The private equity shop is the debtors’ prepetition lender and they are influencing the trajectory of this case; they will provide a $143.1mm DIP (of which only $23mm is new money) and they are acting as the stalking horse purchaser of the debtors with a $138mm purchase price offer (a credit bid, no doubt). The debtors intend to pursue a dual-sale and plan process with the hope of maximizing value for the benefit of all stakeholders.**

*Yes, this is the Logan’s Roadhouse that was in bankruptcy back in 2016. In the prior bankruptcy, Logan’s closed approximately 34 locations.

**So, at least there’s something new here. It’s not everyday that you see a top SEVENTY-FIVE creditors list, most of which is chock full of landlords and unsecured noteholders (Wells Fargo Bank NA, Marblegate Special Opportunities Master Fund LP, FS KKR Capital Corp., FS Investment Corporation II, Carl Marks Strategic Opportunities Fund II LP, Carl Marks Strategic Investments LP, Kelso & Company). It doesn’t look like Marblegate will recover anything on these notes which is a shame because there are likely to be more taxi medallions for sale sometime soon.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: see above.

• Professionals:

  • Legal: Katten Muchin Rosenman LLP (Steven Reisman, Bryan Kotliar, Peter Siddiqui, Lindsay Lersner) & Klehr Harrison Harvey Branzberg LLP (Domenic Pacitti, Michael Yurkewicz, Morton Branzburg)

  • Financial Advisor: M-III Advisory Partners LP (Colin Adams)

  • Investment Banker: Configure Partners LLC (Vin Batra, James Hadfield)

  • Real Estate Advisor: Hilco Real Estate LLC

  • Strategic Communications Advisor: Kekst CNC

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • First Lien & DIP Agent: Fortress Credit Co.

    • Legal: King & Spalding LLP (Austin Jowers, Michael Handler) & Hunton Andrews Kurth LLP (John Schneider) & Chipman Brown Cicero & Cole LLP (William Chipman Jr.)

  • Stalking Horse Purchaser: DBFLF CFTWE Holdings L.P. (an affiliate of Fortress Credit Co.)

  • Second Lien Agent: Wells Fargo Bank NA

    • Legal: Morgan Lewis & Bockius LLP (Jennifer Feldshur, Sula Fiszman)

  • Sponsor: Centerbridge Capital Partners

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Andriana Georgallas, Bryan Podzius) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Jaime Luton Chapman, Jordan Sazant)