CHUX – Removing CHUX from the dreaded list

I’m officially removing CHUX from the Restaurants @ Research Edge bankruptcy list. The remaining players on the list include DIN, RUTH and RT.

On the 3Q98 conference call CHUX’s management said they would limit capital spending to only maintenance capital spending. The balance of the cash would be used to reduce debt by the end of fiscal 2009. Unfortunately, that alone would not eliminate the potential of being in default of their bank credit agreement if business trends remained on the current trajectory.

The only answer is a liquidity event for the company. Currently, the company owns the land and building on 100 stores, of which 15 are not pledged as collateral to the banks. I believe that company will do a sales leaseback on the 15 properties to generate cash and repay the bank debt. The transaction will be dilutive to EPS as the lease payment will be higher that the interest on the bank debt, but the risk of default is eliminated. The sale-leaseback will not happen all at once, but over the next 3-4 months.

A liquidity that eliminates the potential for default will be a significant catalyst for short covering.