The exterior of a Sbarro restaurant in Manhattan. The Melville-based...

The exterior of a Sbarro restaurant in Manhattan. The Melville-based Italian-food chain reached an agreement with lenders and most note holders to reduce its debt and sell shares. (Feb. 1, 2011) Credit: Charles Eckert

Sbarro Inc., the quick-service Italian restaurant chain, struck a deal with a majority of its senior lenders and filed for Chapter 11 bankruptcy protection Monday, hoping to reverse its financial troubles as quickly as possible, the company said.

Melville-based Sbarro Inc., which has 1,045 restaurants around the world and 14 locations on Long Island, reached an agreement with all of its second-lien secured lenders and almost 70 percent of its senior noteholders to reduce its crippling $368-million debt by some 53 percent, or about $195 million, in exchange for equity, court documents said.

If the court approves, Sbarro will have access to $35 million in debtor-in-possession financing to continue its business operations. The company also will be able to raise $30 million by offering new stock to existing shareholders -- a process guaranteed by two major lenders. The company, which was bought by private-equity firm MidOcean Partners in 2007, said it expects its restaurants to operate "without interruption during the restructuring process."

"We believe this plan represents the best opportunity for Sbarro to clear a path for future growth by restructuring its debt in an effective and timely manner," said Nicholas McGrane, interim president and chief executive of Sbarro Inc., in a statement.

In the court filings, McGrane notes that the company's business was hit hard by a surge of prices for raw materials such as cheese and flour in 2007 and 2008. Its restaurants, many of which are located in malls, suffered from "unprecedented declines in mall traffic" during the height of the recession in the fourth quarter of 2008 and most of 2009.

"Price increases and cost-cutting measures taken to combat commodity inflation and maintain earnings during this difficult period contributed to challenges with the brand, and performance lagged the rebounds in mall traffic beginning in early 2010," court documents stated.

Sbarro had to contend with the frugal mindset of its consumers, many of whom had been hurt financially during the recession, said Barry Berman, Hofstra University business professor.

"They cater to more of a working-class family than an affluent family and the working class has really been affected by the recession," Berman said.

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