Z Capital in Sun Capital DIP fight

The distressed debt specialist is offering a competing debtor-in-possession loan for bankrupt Sun Capital Partners portfolio company Real Mex, one of two restaurant chains the firm controls to go bankrupt this week.

Chicago-based private equity firm Z Capital Partners has offered to provide a debtor-in-possession (DIP) loan for bankrupt Sun Capital Partners restaurant chain Real Mex, a source with knowledge told Private Equity International.

A major holder of the debt tied to Real Mex, Z Capital faces competition from GE Capital, which has also offered a $49 million DIP loan for the bankrupt restaurant chain. DIP financing is used by companies to operate through the bankruptcy process and will generally offer modest returns to lenders.

Real Mex, which owns brands such as Chevys Fresh Mex and El Torito, has seen its annual revenue drop from $553 million in 2008 to $500 million in 2009 and $478 million last year. The company is the second Sun Capital-backed business to file for bankruptcy this week, as Friendly Ice Cream Corporation filed for bankruptcy Wednesday morning.

The companies blame the shaky economic environment for declines in sales, leading to the need to restructure.

Z Capital specialises in managing assets in both distressed private equity and leveraged finance investments. Established in 2006 by former founder of Black Diamond Capital Management James Zenni, the firm focuses on control strategies using distressed debt, typically involving purchasing portions of debt in struggling companies to obtain control of the company. As of 30 June 2011, Z Capital had collected $300 million for its North America-focused special situations fund.

Sun Capital Partners acquired Real Mex in 2006, investing $199 million of equity in a deal worth a reported $359 million. The firm invested in the company from its fourth fund that collected $1.5 billion in 2005. It is not the first Fund IV portfolio company to file for bankruptcy, as Sun Capital previously injected capital into Big 10 Tires and Fluid Routing Solutions to ensure control through their respective bankruptcies.

Sun Capital was unavailable for comment at press time.