Banks Still Waiting for Sbarro To Deliver

Sbarro, the quick-serve pizza chain owned by MidOcean Partners, could be in trouble with its banks again.

Last quarter, Melville, N.Y.-based Sbarro posted 12-month trailing EBITDA of $41.7 million, which is just $1.7 million shy of breaching a covenant agreement with its lenders.

This comes just one year after the company was in noncompliance with its banks over its high debt (currently $336.3 million) but was able to get a waiver and refinance. The refinancing required Sbarro to maintain a minimum 12-month trailing EBITDA of $40 million each quarter. This minimum will rise to $43 million in December, according to regulatory filings.

And this isn’t only a leverage problem. Last quarter, the company’s net loss widened to $18.8 million, from around $6.5 million for the same time period in 2009. Revenue dropped nearly 5%  to $76.1 million. Sbarro attributed the revenue decline to a drop in same store sales of $4.5 million, or 6.2%, and lost sales of stores closed of $1.4 million.

Last week, Standard & Poor’s lowered its corporate credit rating for Sbarro to ‘CCC-‘ from ‘CCC+’ with a negative outlook. If Sbarro were to breach its EBITDA covenant agreement, its banks could stop lending to them and call their loans, says Mariola Borysiak, an S&P analyst.

“This could lead to a bankruptcy,” says Gerry Herschberg, a senior S&P analyst. “But Sbarro could also get another waiver from their banks.”

One lending executive says a Sbarro bankruptcy is highly unlikely. The banks would most likely consider some kind of amendment, including a change in covenants, to accommodate any new circumstances, the source says.

In 2007, MidOcean acquired a 76% stake in Sbarro in a deal valued at $450 million.

Several restaurants, including Bennigans and Black Angus, filed for bankruptcy protection during the recent broad market downturn.  Sbarro was widely expected to join them since most of its stores are located in shopping malls. This leads to a heavy reliance in fourth quarter holiday season. S&P estimates that about 40% of Sbarro’s annual EBITDA comes in the fourth quarter.

S&P thinks Sbarro’s will remain pressured in the near term given the sluggish economic recovery and commodity price increases.

Sbarro’s declined comment. MidOcean could not be reached for comment.