Fortress Credit early favorite to buy Red Lobster in auction approved for July

Other restaurant companies or investment groups could also submit bids, but experts believe the chain's debt may be too much for external companies to take on.
A Red Lobster restaurant in Miami, Florida, U.S.A.
A Red Lobster restaurant in Miami, Florida, U.S.A. | Photo courtesy of Deutschlandreform/Shutterstock
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Fortress Credit Corp. has been confirmed as the stalking horse bidder in the auctioned sale of Red Lobster, approved to take place in late July by the judge overseeing the Orlando, Florida, U.S.A.-based seafood restaurant chain’s bankruptcy proceeding.

Fortress, a private investment firm with USD 48 million (EUR 44.7 million) under management and a focus on distressed companies, has become one of Red Lobster’s largest creditors.

On 14 July, U.S. Bankruptcy Court for the Middle District of Florida Judge Grace Robson gave Red Lobster access to USD 100 million (EUR 257 million) in debtor-in-possession (DIP) financing facility offered by Fortress. That amount will be used as a stalking horse bid at the auction, according to court documents.

The DIP financing, stemming from a prepetition term loan from Fortress, includes USD 100 million (EUR 93 million) in new money, as well as a roll-up of USD 175 million (EUR 163 million) in prepetition debt.     

The deal was made possible through a bargain struck between Fortress and Red Lobsters unsecured creditors, which had recently challenged liens that Fortress Credit has on the bankrupt restaurant chain’s assets.

The agreement includes USD 2.5 million (EUR 2.3 million) in plan funding that will be reserved for priority claims first and then used to administer the plan and pursue litigation against equity holders and other insiders, Jeffrey Dutson, an attorney with King & Spalding representing Red Lobster, said during the hearing, according to Debtwire. That amount could be increased by up to USD 250,000 (EUR 233,000), depending on whether there are unused legal fees remaining.

Fortress’s resolution of its dispute with its unsecured creditors made sense for the entire estate, Bradford Sandler of Pachulski Stang Ziehl & Jones said during the hearing, because having a lot of litigation in a restaurant bankruptcy case is not good as restaurants do not age well in bankruptcy.

The unsecured creditors first opposed Red Lobster accessing USD 175 million in funds that would include new liens on "extremely valuable, previously unencumbered assets,” including proceeds of avoidance actions, cash on hand at store locations, liquor licenses, and critical leases and real estate used in the debtors' ongoing operations,” according to Seafax.

“The DIP facility is fundamentally flawed and should be denied in its present form. Pursuant to the DIP facility, the prepetition term loan secured parties seek to effectuate a massive and inappropriate 'land grab' at the expense of unsecured creditors,” the unsecured creditors wrote in their objection.

Red Lobster filed a Chapter 11 petition on 19 May after closing more than 100 restaurants nationwide. The company could close up to 135 additional restaurants.

Other restaurant companies or investment groups could also submit bids to acquire Red Lobster, but that is unlikely, according to Victor Sahn, a bankruptcy and reorganization partner at Greenspoon Marder. Red Lobster already hired an investment banker to market the chain for sale prior to its bankruptcy filing, but no buyers came forward, Sahn told Restaurant Dive.

Even though Red Lobster has shed poorer-performing restaurants from its portfolio, it is a pretty steep hill to climb” for a potential buyer to be willing to take on all of Red Lobsters debt instead of Fortress Credit just handling it, Sarah Foss, the global head of legal at Debtwire, told SeafoodSource.

Red Lobster already had access to a USD 40 million (EUR 37 million) single draw loan on an interim basis while the fully requested amount was considered, Seafax reported.

Simultaneously, Red Lobster Canada is asking the Superior Court of Justice in Ontario to recognize a stalking horse bid from its lenders and approve a sales process for its assets, according to the Global News. The filing is necessary to preserve Red Lobster’s business in Canada, according to court documents. The hearing is taking place 18 June.

Additionally, two class-action lawsuits have been filed against Red Lobster, both alleging breaches of the Worker Adjustment and Retraining Notification (WARN Act). A former Red Lobster employee in New Jersey, Donna Lowe, filed a class-action lawsuit in U.S. District Court in Orlando on 17 May, which has become part of the U.S. Bankruptcy Court proceedings against Red Lobster.

A second suit filed in California on 14 June alleges the restaurant chain violated the WARN Act and the California Worker Adjustment and Retraining Act (California Warn Act) by failing to provide adequate notice when it laid off employees nationwide and closed restaurants on 13 May.

If it wins Red Lobster at auction, Fortress will ...

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