PizzaExpress Shareholders Considering Equity Injection to Support A&E of 2026 Bonds; K&E Retained as Counsel; 2026 Notes at 82, Yield 21.6%

PizzaExpress’ main shareholders Cyrus Capital Partners and Bain Capital are considering an equity injection to facilitate an amend-and-extend of the company’s £335 million bonds due in 2026, sources told Octus, formerly Reorg.

Advised by PJT Partners, the U.K.-based casual dining chain has been exploring its options to address the 2026 notes. The company has retained Kirkland & Ellis as legal advisor, sources said.

According to sources, an equity injection of around £40 million to £50 million should be sufficient to get creditors’ support.

Given the 21.6% yield on the bonds, which are quoted at 82.1, a straight refinancing looks challenging amid a difficult macroeconomic environment. Among several options, PizzaExpress is considering a private credit refinancing, and waiting for the results of festive season trading before taking a decision.

As reported in Octus’ recovery analysis, we did not see enough runway for the group to deliver a material upturn in credit metrics in time for it to be able to push through an open market refinancing, as we expect softness in top line and margins, limiting chances of deleveraging toward adequate levels over the next 12 months. Nonetheless, under our base case, despite a high loan-to-value, the group’s debt appeared to be covered. Consequently, we viewed an A&E of SSNs to be the most viable option to address its capital structure – as it would likely allow the group to navigate a challenging near-term macroeconomic environment in the U.K., while being able to recover from prospects of an improving operating environment over the medium term.

PizzaExpress’ SSNs were issued in 2021 as part of a refinancing of its post-restructured debt. In 2020, the group underwent a debt restructuring that saw its total gross debt slashed to £319 million from £735 million. The transaction fully equitized its £200 million senior unsecured notes, and £265 million of the £465 million SSNs, which were due in 2021, with £200 million of the secured notes reinstated with an extended 2025 maturity. These 2025 notes were subsequently refinanced with the outstanding 2026 notes.

Uncertain Future

PizzaExpress continues to face persistent headwinds from high energy costs, inflation, rising living expenses and sluggish consumer confidence, all of which have impacted operational performance since the pandemic, as reported. The group’s revenue was down 3.9% year over year to £110.1 million in the third quarter ended Sept. 29, post-IFRS 16 EBITDA declined 11.7% year over year to £21.1 million in the quarter.

In the third-quarter earnings call last November, management said cost measures are in place, but it did not provide guidance on the impact of higher-than-expected Employer National Insurance and minimum wage increases on the business.

Starting this April, the combined impact of rising employer national insurance, or ENI, and the annual increase in the National Living Wage is set to significantly weigh on cost structures for U.K. businesses. PizzaExpress will be particularly impacted given companies with discretionary offerings, slim profit margins, or limited ability to pass on costs will feel the strain most acutely, according to our analysis. The group’s wages and salaries amounted to about £161.5 million, or 35.5% of sales in the full year 2024 – the largest component of its cost base.

With cost controls being constrained by headwinds, PizzaExpress has struggled to generate meaningful positive levered free cash flow. In the LTM to June 30, 2024, the group broke even after growth capex on refurbishments and new stores. Octus expects refurbishment plans to continue to weigh on levered free cash flows with positive cash generation under base case seen in FY’26. However, any A&E will need to come with a coupon uplift, which would place further pressure on cash generation.
 

To access Octus’ recovery analysis of PizzaExpress, click HERE.