Sbarro Inc. pizza chain has defaulted on a credit agreement and has hired Rothschild Inc. to help it explore strategic financial options.

According to Reuters, the 55-year-old company notified lenders of the default, and filed with the U.S. Securities and Exchange Commission on Wednesday. 

Melville, N.Y.-based Sbarro runs close to 1,000 restaurants in 30 countries.

News of the default led to a credit rating downgrade to “junk” grade with a negative outlook from Standard & Poor’s. S&P called the company’s capital structure “unsustainable.”

The default was attributed to the economic downturn, as well as a decrease in mall traffic, where many Sbarro’s restaurants are located.

Sbarro issued a notice to lenders Janunary 3 regarding its expected failure to post the minimum level of EBITDA required by a first lien credit agreement. As of that date, the company owed $172.7 million.

On Dec. 29, 2010, Sbarro received a default notice from an investor that holds a majority of its senior notes.

Ninety-five percent of Sbarro’s second lien debt is held by MidOcean Partners, which bought the company in 2007. Lenders under the credit agreement have agreed not to demand immediate repayment until Jan. 31 or the occurrence of other events.

Sbarro is currently in talks with creditors in regard to its long-term capital structure.

 

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