Cypress-based Real Mex Restaurants Inc. completed a refinancing of its major debt this month to help the company better weather the restaurant industry downturn.
The Mexican restaurant chain, which runs El Torito and others, completed a $130 million bond sale earlier this month to buy a little time in paying down its $155.8 million debt.
“We refinanced all of our debt to make the terms a little less restrictive,” said Steve Tanner, chief financial officer. “We have given ourselves a much longer runway in these difficult times.”
The company had been on the watch list of debt-rating agencies as it faced a big debt payment next year.
“Everyone was being kind of hard on us because we’re in the causal dining industry and we had that fairly short maturity (on our debt),” Tanner said.
Credit Ease
Real Mex took advantage of a credit market that’s eased since the fall meltdown, as have many other Orange County companies.
“With the way the economy is and a majority of our debt nearly a year out, we could have had some real problems, if the credit markets hadn’t eased up a bit,” Tanner said.
Real Mex used the proceeds of its bond sale to pay off debt due next April. It issued 3.5-year bonds, priced at 90% of face value and paying interest of 14%. Including the discount on the price of the bonds, they end up yielding investors 18%.
Moody’s Corp. rated the debt at “B2,” within its second highest tier for high-yield or junk bonds.
The sale brought in about $117 million for Real Mex after expenses.
“Our total debt only went up $10 million,” Tanner said. “At the end of the day we didn’t put any cash in our pocket, but we gave ourselves three years.”
The moves were driven by Real Mex’s new chief executive, Richard “Dick” Rivera.
Rivera came on board in April from Florida-based restaurant management and investment firm Rubicon Enterprises LLC, where he served as chief executive.
“He’s brought a new perspective on what we need to do here to impact our current operations and improve our operational execution,” Tanner said.
Rivera is an industry veteran having served as the chairman of the Washington, D.C.-based National Restau-rant Association from 2007 to 2008 and worked for Florida’s Darden Res-taurants Inc. as vice chairman, president and chief operating officer from 2002 to 2004.
He also has held executive positions with At-lanta-based Rare Hos-pitality International Inc., Lake Forest-based Del Taco LLC and Texas-based Steak & Ale Res-taurants of America.
“His resume is kind of the who’s who in the casual dining industry,” Tanner said.
Rivera wasn’t available for comment.
He replaced Tanner, who had been serving as interim chief executive after Fred Wolfe resigned in December amid an ownership shakeup.
Late last year, private equity firm New York-based Kohlberg Kravis Roberts & Co. and hedge funds San Francisco-based Farallon Capital Management LLC and Beverly Hills-based Canyon Capital Ad-visors LLC took control of Real Mex by forgiving debt in exchange for stock.
The company previously was majority owned by Florida-based Sun Capital Partners Inc.
The debt-for-stock swap reduced Sun Capital’s holdings to about 15%, putting the other firms in control.
With Rivera at the helm, the company is looking to spur business with the addition of items less than $8 to appeal to price-sensitive customers.
Real Mex has been beefing up its marketing with new menus and radio spots to tout low-cost items.
“We rolled out a number of new marketing initiatives promoting our value deals at the start of this month,” Tanner said. “The advertising is targeting our loyal customers who just can’t afford to come in as often as they would like.”
Heavy Discounting
The company is staying away from heavy discounting, Tanner said.
“You can’t make money with two-for-one deals that many chains are offering,” he said. “You can pull customers in, but there’s no money to be made from a two-for-one deal.”
For the first quarter, Real Mex’s revenue fell 7% from a year earlier to $128.5 million. The company, which reports results for debt holders, posted a net loss of $8.9 million, widened from a loss of $2.2 million a year earlier.
Real Mex has focused on cost cutting, Tanner said.
The company’s efforts, as well as lower food costs, helped it record an 8.7% decline in the cost of sales, a 5.7% decline in labor expenses and a 5% drop in operation and occupancy expenses.
In addition, Real Mex’s general and administrative expense was cut by 14.3%, according to the company filings.
The Mexican restaurant chain has $553 million in yearly sales and employs about 1,700 OC workers.
