LONDON (Reuters Breakingviews) - PizzaExpress customers used to complain its pies were shrinking. The restaurant chain’s owners and creditors know the feeling. Hony Capital, which paid 900 million pounds for the UK company in 2014, is in danger of losing its entire investment. Snapping up unsecured bonds might boost the Chinese buyout firm’s bargaining power in a restructuring, but its hand looks weak.

PizzaExpress has grappled with a host of bad ingredients. British restaurant chains are struggling with excess capacity, fickle customers, and rising costs from a falling pound and higher minimum wages. A tired brand and high debt made the company particularly vulnerable. Hony promised deep pockets and access to Chinese diners. But five years of expansion in the People’s Republic, as well as other parts of Asia and the Middle East, have yet to spin a profit.

The situation looks bleak for Hony. PizzaExpress has gross debt of 665 million pounds, of which 465 million pounds has a superior claim over the company’s assets. Standard & Poor’s reckons it might generate EBITDA of 75 million pounds next year. Apply a multiple of, say, 6 times - a discount to faster-growing peer Restaurant Group - and PizzaExpress is worth 450 million pounds including debt. That implies a total loss for the Chinese group’s equity, and for the unsecured debt.

It’s therefore surprising that Hony wants to buy more of that debt. The firm founded by John Zhao recently offered to buy PizzaExpress bonds originally worth 80 million pounds for between 20% and 40% of their face value. That would give it just over half the bonds in the class, analysts at Reorg reckon, possibly helping it get a better deal in debt restructuring talks.

If that’s the plan, it’s not obvious that such an aggressive manoeuvre will work. Many of the unsecured bonds are held by hedge funds, who will demand a steep price, or may have bought protection against a default. Holders of secured bonds might force through a restructuring that could wipe out Hony and other creditors. The snag is that a messy default could scare off suppliers and even more customers. Unless Hony is prepared to stump up more cash, though, it will be lucky to emerge with more than a few crusts from this shrunken pie.

CONTEXT NEWS

- Holders of PizzaExpress’s unsecured bonds have until Dec. 5 to decide whether to accept a tender offer from Hony Capital, the Chinese private equity group that acquired the UK dining chain in 2014.

- Hony on Nov. 6 offered to buy up to 80 million pounds of the 8.625% unsecured bonds, which rank as junior to PizzaExpress’s 465 million pounds of secured bonds, at a price between 20% and 40% of their face value.

- The unsecured bonds are currently trading at around 25% of face value, according to Refinitiv data.

- PizzaExpress’s EBITDA fell 8% in the first half of the year to 32 million pounds as its restaurants were hit by a stagnant domestic dining market and rising costs.

- Standard & Poor’s said in September that it expects EBITDA to range between 70 and 75 million pounds in 2020, and debt to be between 9 and 9.5 times EBITDA.

(Editing by Peter Thal Larsen and Oliver Taslic. Additional reporting by Anna Szymanski.)

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