The Dough Deflates: Pizza Express struggles with £1.1 billion debt pile-up

October 25, 2019

3 min read

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What's going on here?

Pizza Express is facing financial struggles with a debt pile of £1.1 billion as a result of increased competition, overly-ambitious overseas openings and a lack of innovation.

What does this mean?

Following a chain of high street restaurant closures, as illustrated by the collapse of Jamie’s Italian (for information see our article on that here), Pizza Express is the latest in line to experience financial difficulties. Against a backdrop of an increasingly saturated and fast-moving market, the company has employed financial advisers to negotiate their £1.1billion debt with lenders.

Pizza Express’ operating profits have been offset by the £9.3 million interest payments on their debt pile. Their debt payments have pushed the company into the red for the last two years, causing a loss of £55 million last year alone. Though initially at the forefront of the industry, Pizza Express has struggled to maintain their position over the years as casual dining has become a £9 billion business with competitors keen to penetrate the industry. This can be attributed to their inability to keep up with changing consumer demands and their reliance on discounted offers. 

Brexit is also adversely impacting the business as economic uncertainty is discouraging people from eating out. Pizza Express also heavily relies on EU workers to staff its restaurants and has therefore struggled to hire since the 2016 referendum. On top of that, rather than focusing on strengthening its domestic consumer base, the company has been over-borrowing in an attempt to continue its costly overseas expansions. This has only increased their net debt levels as the extra cost of these openings is estimated to be at around £9 million for operations that add little to earnings. Slower consumer spending and increased costs from rising business debts have pushed the company into severe debt.

What's the big picture effect?

Pizza Express is not yet in imminent danger of defaulting because they have until 2021 to start paying back their creditors. However, its bonds are currently selling at 84p for every £1 worth of its loan. In other words, investors are not confident that they will be getting their money back. Pizza Express will require debt restructuring to tackle its £1.1 billion debt pile. Debt restructuring is a process used by financially-distressed companies to avoid the risk of default on existing debt by negotiating with creditors to restore its liquidity and stay in business. This is usually the first step in the process of reaching an agreement with creditors on how to manage repayment of the debt, without the client becoming insolvent. 

Pizza Express is currently engaged in talks with financial adviser Houlian Lokey and has appointed law firm Latham and Watkins to assist as advisers. The work here is non-contentious as restructuring lawyers negotiate agreements and repayment schedules to help the client pay off the debt without becoming insolvent. This requires hefty alterations to be made to the debt, operations or structure of a company with its creditors’ consent. Restructuring makes debt repayments more manageable and discourages contentious insolvency proceedings. 

Other restaurant chains that have gone bust have sought company voluntary arrangements (CVA) in an attempt to reduce their debt by encouraging landlords to agree to lower rents. The proliferation of this method of debt restructuring has led to strong resistance from landlords, who are discontented with the new burdens placed upon them. Although Pizza Express has noted that they will not pursue this avenue, it is useful to know that this is one method of debt restructuring commonly used today. However, in practice, CVAs are unsuccessful in the long-term; the demise of BHS, ToysRUs and House of Fraser in administration proceedings all occurred after CVA agreements were negotiated.

In general, lawyers working on restructuring will have to be skilled at carrying out transactional work and litigation across a range of areas such as mergers and acquisitions, securities, tax, IP and banking.

Report written by Robyn Ma

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