In many ways, a Chapter 11 bankruptcy filing works like a patient in critical care. Sometimes there's optimism entering the process and, at other times, there are grave concerns, but there's always uncertainty.
When a company files for Chapter 11 bankruptcy protection, it's admitting that it has serious underlying financial issues. Basically, a company that can pay its bills won't file for bankruptcy because it means giving up control of its fate.
Related: Struggling fast-food chain operator files Chapter 11 bankruptcy
A business can enter Chapter 11 with a full financial plan and the seeming agreement of its creditors, but that does not mean the process will go smoothly. In many cases, companies use a Chapter 11 bankruptcy as a way to get vendors, landlords, and creditors to forgive some debt, exchange equity for debt, or push financial obligations further out.
There are often filings where a company believes it has worked out a deal with its creditors before it files. That should, but does not always, lead to a smooth process.
If one key partner or lender changes its mind and objects to the deal, things can fall apart quickly. In addition, the bankruptcy court has an obligation to creditors as well as customers and employees. The company may have a deal in place that would allow continued operations, but a higher bid that would break it up could be accepted by the court.
That means that any Chapter 11 bankruptcy plan could get disrupted in a way that the company never planned for.
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Red Lobster learns its Chapter 11 bankruptcy fate
Red Lobster entered bankruptcy with a plan to sell to RL Purchaser, an entity created by its existing creditors led by Fortress Credit Corp. At the time of the May 19 bankruptcy filing, those lenders were owed a combined $264 million.
Related: Another popular beverage brand files Chapter 11 bankruptcy
RL Purchaser submitted a stalking horse bid of $376 million for the chain, but another bidder could offer more and take over the company. No such bidder emerged by a July 19 deadline and the restaurant chain has canceled a planned auction set for July 30 since no suitor submitted a qualifying bid, according to court documents.
"The purchase price of the stalking horse bid will include a credit bid on a dollar-for-dollar basis of the full debtor-in-possession obligations, the assumption of all assumed liabilities, and the excluded cash," RestaurantDive reported.
A hearing on the proposed sale will take place on July 29 in the U.S. Bankruptcy Court for the Middle District of Florida.
Red Lobster faces more problems
At the time of its bankruptcy filing Red Lobster immediately closed 95 locations. Another 120 restaurants could close if the new owner can't reach deals with its landlords.
In many cases, Red Lobster offered zero back rent and has not shown how it would pay even a renegotiated lower rent at those locations.
If no deal can be reached on back rent and new lease rates, the bankruptcy court will step in and determine what payments the new owner would have to make. It's possible, although unlikely, that the sale could not be approved until an agreement has been reached with more creditors.
So far, however, the Chapter 11 bankruptcy process has largely gone as planned. CEO Jonathan Tibus was hopeful for a quick resolution when the company filed in May.
More bankruptcy:
- Tinker Toy, Tonka toymaker files Chapter 11 bankruptcy
- Another coffee and cafe company files Chapter 11 bankruptcy
- Distressed home improvement retailer plans Chapter 11 bankruptcy
"This restructuring is the best path forward for Red Lobster. It allows us to address several financial and operational challenges and emerge stronger and re-focused on our growth. The support we’ve received from our lenders and vendors will help ensure that we can complete the sale process quickly and efficiently while remaining focused on our employees and guests,” he said.
At the moment, it appears the chain will survive, but how big it will be remains a significant question.
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