Financing

El Torito owner files for its 2nd bankruptcy

Real Mex Restaurants files for debt protection and has a buyer willing to pay $47 million.
Photograph courtesy of Real Mex/RM Holdco

Real Mex Restaurants, the owner of El Torito and Chevys Fresh Mex, filed for bankruptcy protection Monday after reaching an agreement over the weekend to sell itself to Z Capital Group for $47 million.

Z Capital is a “stalking horse bidder,” meaning another buyer could step in and pay more for the Cypress, Calif.-based company.

Real Mex has nearly $42 million in first lien debt, meaning it gets paid first in a bankruptcy, and $195 million in second lien debt.

It’s the second such filing for Real Mex, which first filed for debt protection in 2011 and was sold shortly thereafter. The company has shrunk considerably in the years since, to 68 locations now from 128 in 2012 and more than 200 before its previous filing. The reduction includes nine restaurants that were closed last month.

All but seven of the company’s restaurants are in California.

Bryan Lockwood, the company’s CEO, called the filing “an important step in completing the sale process that Real Mex began late last year.” He said that the process should be “seamless” and will put the company in a “stronger financial position.”

In bankruptcy court filings, Real Mex blamed its filing on a variety of factors, from a difficult operating environment for casual-dining restaurants to the presence of fast-casual Mexican options and an apparent failure to train employees on “risk management,” leading to a lot of lawsuits.

Real Mex operates El Torito, Chevys, Acapulco and some other restaurants and employs 4,600 people.

Z Capital is already a partial owner of the company, along with Tennenbaum Capital Partners, which together provided lending to help the company get through the bankruptcy process.

Real Mex said in a court filing that since emerging from bankruptcy in 2012, the company failed to produce enough cash to cover its expenses and service its debt. The company shuttered its centralized distribution company in 2013, which had been losing more than $1 million a month.

The company also said that it has spent “millions of dollars to date” to shut down unhealthy locations due to lawsuits from landlords.

In 2016, Real Mex began spending money to expand its overall footprint. It hired advisors on mergers and acquisitions as well as executives with experience in running larger organizations. And it brought its accounting in-house.

Real Mex tried to buy Garden Fresh Restaurant Corp., the owner of Souplantation and Sweet Tomatoes. It was instead sold to a pair of private-equity groups in 2017.

Interestingly, Real Mex also blames a higher-than-typical number of lawsuits for the filing.

Before hiring Lockwood as CEO, the company “experienced higher-than-normal litigation and enforcement-related expenses” due to human resources’ failure to “educate employees on risk management” and a failure to spend on deferred maintenance.

“There were also no clear compliance platforms for crucial policies such as alcohol awareness, sexual harassment and food handling safety, leading to costly health and safety complaints,” the filing said.

Real Mex has increased its focus on “risk management and deferred maintenance” since 2015, which has reduced those costs, but the company says the prior litigation and compliance costs have hurt its profitability.

Real Mex says that its restaurants themselves generate cash and late last year began exploring a sale.

Ultimately, Z Capital emerged to become the company’s stalking horse bidder. Yet the company’s secured loans matured and were to be paid earlier this year. And litigation related to the nine restaurant closures last month led the company to file for bankruptcy protection.  

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