Melville-based quick-service food chain Sbarro Inc. saw its corporate credit rating fall this week as it continues to struggle under a heavy debt load that a credit-rating agency deemed "unsustainable."
The company, which operates and franchises about 1,000 fast-food Italian restaurants worldwide, is having trouble meeting obligations on loans of more than $172 million, according to filings with the Securities and Exchange Commission. On Monday, Sbarro Inc. obtained a month's reprieve to renegotiate with its creditors.
Standard & Poor's on Thursday released a report that lowered the company's credit rating from CCC- to CC - a grade designating the company as "highly vulnerable" - and said it expects Sbarro will try to restructure, potentially leading to selective loan defaults or filing for bankruptcy protection.
"The ratings on Sbarro reflect Standard & Poor's belief that the company's current capital structure is unsustainable and that it is unable to service its existing debt," the report stated.
The company declined to comment, but Sbarro's financial filings last year show that the company's future was uncertain.
In its third-quarter report, Sbarro noted that the company was "highly leveraged" and faced increasing commodity costs, particularly for cheese and flour. The company also pointed to a number of factors - its pressing large debt payments, low cash on hand, general economic uncertainty and no available means to restructure or refinance debt - that raised "substantial doubt regarding the company's ability to continue as a going concern."
Sbarro Inc., which originated as a family-based business in Brooklyn in 1956, was acquired by MidOcean Partners, a Manhattan private equity firm, in 2007. Its headquarters remained in Melville. The company plays an important role in Long Island's restaurant economy, with its many restaurants on Long Island and its distinct and well-known business platform, said Jerome Reisman, a Garden City attorney who specializes in bankruptcy cases.
"When these private equity firms acquire these companies, they often do this with leverage and borrow against the assets to finance the acquisition, which often results in a tremendous amount of debt," he said.
The restaurant industry is beginning to see some recovery, with quick service establishments leading the way, said Bonnie Riggs, restaurant industry analyst for The NPD Group, a Port Washington market research firm. Pizza restaurants started seeing a turnaround, especially with increased marketing from big players like Domino's, she said. But the recovery of the restaurant industry will not be quick, she said.
"We're saying that throughout 2011 traffic [customer visits] will be slightly positive but it won't be growing by leaps and bounds," Riggs said. "It will take another year and a half to get back to where we were before the recession started."