Sbarro LLC, the pizza restaurant chain operator filed for a bankruptcy protection after the company incurred too much debt and experienced customer declines at its restaurants that are primarily located in shopping malls.

sbarro logo

According to the Wall Street Journal, Sbarro’s lenders for a debt equity swap supported its intention to file for bankruptcy protection. The pizza restaurant chain operator submitted its chapter 11 bankruptcy application on Monday morning. This is the second bankruptcy protection filed by the company in less than three years.

Lenders support new management strategies

Sbarro indicated that 98% of its lenders voted in favor of the prepackaged plan, which allows them to exchange $140 million in debt to gain control of the reorganized company. Its CEO David Karam said the company’s agreement with lenders indicates their “support and confidence” to the growth strategies developed by the new management over the past nine months.

The group of lenders agreed to provide $20 million bankruptcy loan to Sbarro to finance its chapter 11 restructuring.

Sbarro’s pre-packaged plan

The pizza restaurant chain operator announced its plan to close 155 out of its 400 restaurants in North America last month as part of its initiative to reduce costs.

Sbarro’s prepackaged plan indicated that a combination of store closures and balance sheet restructuring will improve its profitability. The company also believed that the strategy will help reduces its outstanding debt by over 80%.

In addition, Sbarro will also put its business up for auction to test the debt-swap to ensure maximize recoveries for creditors. The company emphasized that it will immediately seek a confirmation for standalone reorganization if it does not receive better offers for its business.

Sbarro used its last stay in bankruptcy to reduce 70% of its liabilities. The company’s existing debt is $130 million, down from $400 million.

In the latter part of 2011, Sbarro emerged from its first chapter 11 bankruptcy after a debt-for-equity swap with lenders. It has 800 stores across 40 countries. Its current bankruptcy protection does not affect the 600 franchise locations worldwide. The company filed for bankruptcy protection in the U.S. Bankruptcy Court in New York.