Rubio’s files for bankruptcy protection

San Diego-based Rubio’s Restaurants, Inc. has filed for Chapter 11 bankruptcy protection as it seeks financial stability and better lease terms in a business environment uprooted by the pandemic.

Monday, the 37-year-old, privately held firm filed paperwork with the United States Bankruptcy Court for the District of Delaware to get out from under the pressure of more than $100 million in liabilities. The filing is part of a pre-negotiated plan with its main lender that, pending court approval, could allow Rubio’s to keep many of its restaurants open.

“(When we exit Chapter 11), we will have more than sufficient cash to deal with our current and likely circumstances for the foreseeable future,” said Marc Simon, chief executive of the local fish-taco brand, in an interview with the Union-Tribune. “We’re going to be around for a long time. This process enables us to be (around for another 37 years).”

Per the deal being put before the court, Rubio’s will restructure more than $82 million in outstanding debt that includes a $10 million loan from the Paycheck Protection Program. The sum doesn’t include the company’s real estate leases, which are considered unsecured debt and will likely need to be renegotiated with landlords if they want payment. In addition, the existing lender, Golub Capital Markets, has agreed to invest another $8 million in loan and equity financing to keep the fast-casual business afloat.

Rubio’s ultimately hopes to complete the bankruptcy process before the end of the year, Simon said.

Started in 1983 by co-founder Ralph Rubio, Rubio’s currently operates 170 restaurants — 167 are company-owned stores and three are franchise locations — across California, Arizona and Nevada. The firm went public in 1999 but returned to private ownership through a $91-million sale to Connecticut-based investment firm Mill Road Capital in 2010. The outfit appeared to be operating smoothly until March when state and county COVID-19 regulations mandated store closures or limited dine-in capacity. In June, the chain permanently shuttered 26 restaurants, and announced plans to pull out of the Colorado and Florida markets, where it had hoped to expand.

“Prior to COVID, we were doing just fine,” Simon said. “It’s had a terrible impact on the business and we simply couldn’t overcome that.”

More specifically, the brand suffered because its physical footprint, which does not include drive-thru restaurants, was heavily dependent on foot traffic. Previously, 47 percent of sales came from dine-in business, Simon said. Another portion of the business, catered corporate lunches, also eroded because of the pandemic, he added.

As of early October, 31 stores were operating at 50 percent dine-in capacity, 96 were operating at 25 percent dine-in capacity and 29 were open but prohibited from offering dine-in service, the filings state. Another 11 stores remain temporarily closed. Rubio’s employs around 3,400 active employees and has another 104 employees on furlough. The company used its federal loan to fund payroll and hopes that the debt will be forgiven as part of the PPP program.

Although the company is framing its post-bankruptcy future in positive terms, Rubio’s present-day financial circumstances, as laid bare by executives in court documents, are dire.

For instance, from April through September, Rubio’s operating cash flow was negative more than $2 million, even though it did not pay $6.6 million in rent during the same period, Chief Restructuring Officer Melissa Kibler wrote in her declaration. And at one point, Rubio’s primary lender, Golub Capital Markets, did a “cash sweep,” recouping $6.5 million in money owed directly from the company’s main bank account.

That action appeared to prompt, or at least accelerate, the bankruptcy process, with Rubio’s simultaneously searching for new funding options while it actively negotiated with Golub. In the interim, the firm stopped paying rent at some locations to save money. No other financial prospects materialized, according to the documents, leaving just Golub.

The restructured deal was described as onerous by restaurant analyst John Gordon.

“Because of the high interest rate attached, almost 13 percent, there is risk associated with this on the operating side,” said Gordon, an analyst with San Diego-based Principal Pacific Management Consulting Group. “Rubio’s has to be absolutely, surgically precise and right on the mark in terms of getting (the right stores closed). And the stores that are left in the Rubio’s system have to be more — much more — profitable in order to make the surviving system profitable.”

The company’s current state of affairs is an about-face from the start of the year. Rubio’s disclosed in court filings that same-store sales — stores open a year or more — in 2019 were up 2.4 percent after two years of break-even or declining sales. The momentum even led the firm to retain an investment bank in February to explore a sale of the business.