Restaurant Enterprises Suspends Payment of Interest on Junk Bonds

IRVINE —  Restaurant Enterprises Group Inc. said Wednesday that its cash crunch is so severe it will suspend paying interest on $275 million in junk bonds until sales go up and it can pare its costs of doing business.

The company amassed that debt in 1986, when it bought the Coco’s and Carrows chains of coffee shops, the Charley Brown’s family restaurant chain and the El Torito Mexican restaurant chain. But like other 1980s leveraged buyouts--in which the buyers of a company pledge to repay borrowed money from the company’s future earnings--REG is not generating enough sales to pay off its debt.

The company told the federal Securities and Exchange Commission on Wednesday that before year’s end it will present a plan to restructure its finances without filing for bankruptcy protection. It is standard procedure for companies to report to the SEC any major changes in their financial positions.

During the next four to six months, the company said, it plans to strengthen its balance sheet by cutting costs and selling some restaurants, then leasing them back. The company also expects sales to turn up, which it says usually happens between January and June.

In the meantime, the company said, it will not make a $14.1-million interest payment on the bonds scheduled for Dec. 15. The bond holders--35 investment banks, mutual funds and others--must approve the restructuring plan.

As recently as February, the company took on more debt when it agreed to pay hotelier Marriott Corp. $67 million for 109 Bob’s Big Boy and Allie’s restaurants and spent millions more converting them to Coco’s and Carrows coffee shops.

REG President Norman Habermann defended that acquisition Wednesday, saying it will pay off over the long run in bigger sales.

“It’s been a good one for us,” he said. “From a longer-term strategy, it strengthens our family division” of restaurants.”

The company on Wednesday reported a third-quarter loss of $13 million, which it blamed partly on heavy interest payments. Sales were $239 million. Last year, when the company had fewer restaurants, it lost $7 million on sales of $217 million.

For the first nine months of the year, REG lost $32 million on sales of $707 million. In the first nine months of last year the company lost $15.5 million on sales of $663 million.