Punch Bowl Social

Punch Bowl is aggressively planning to reopen stores closed during the pandemic.

Inside the Bankruptcy Saga of Punch Bowl Social, a Chain Derailed by COVID

The eatertainment brand has dealt with a global crisis, new management, and a bankruptcy fight among lenders. 

Punch Bowl Social was once a rising chain in the eatertainment sector.

First landing in 2012, the innovative concept combines games like shuffleboard, ping-pong, bowling, pinball, and Skee-Ball with a menu that features pan-fried pork chops and chicken and waffles. In the following years, Punch Bowl expanded into major markets like Chicago, Denver, Dallas, and San Diego.

A major milestone came in July 2019 when Cracker Barrel announced a strategic partnership in which it would invest as much as $140 million and take a non-controlling interest in the brand. Then CFO Jill Golder said Punch Bowl had the potential to eclipse 100 stores. 

“We believe this investment is another way we can drive long-term value creation,” Golder said during Cracker Barrel’s Q4 review in September 2019.

At that point, the future appeared bright for Punch Bowl, but the next year and a half proved otherwise. Amid the pandemic, stores shut down and the chain filed for bankruptcy. After an intense battle between lenders CrowdOut Capital and Sortis Holdings, CrowdOut acquired the chain with a $32 million credit bid while Sortis obtained assets not associated with the bankruptcy case.

The saga, with twists and turns aplenty, began in the fall of 2019. As Chief Restructuring Officer Ted Gavin explains, CrowdOut, Punch Bowl’s first lien secured lender, declared default on a loan valued at about $21 million. In early 2020, CrowdOut—in negotiating a forbearance agreement—asked that Cracker Barrel first use a capital infusion to pay down the loan and then eventually pay off the entirety of the loan. Cracker Barrel, which was dealing with its own issues because of the pandemic, said in March 2020 that every Punch Bowl location was closed and that it would not prevent foreclosure on the brand.

“The pandemic was the pandemic for [Cracker Barrel], as well. So while they did the capital infusion to pay down the CrowdOut loan, they did not pay off the CrowdOut loan,” Gavin says.

This began a lengthy process where CrowdOut planned to foreclose on the assets by way of sale under Article 9 of the Uniform Commercial Code. In August 2020, the lender asserted certain voting rights for the principal stock it claimed to have under the loan agreement. Founder Robert Thompson left the brand and John Haywood, former CEO of the defunct Souplantation and Sweet Tomatoes, was appointed as new leader of Punch Bowl. 

When Haywood became CEO, he started preparing for the eventuality of a change in control, Gavin notes. Punch Bowl engaged investment bank P.J. Solomon to run a sales process, but it ultimately did not yield any acceptable offers. Eventually, CrowdOut notified Punch Bowl on December 10 that it was moving forward with a foreclosure sale on December 28.

After Punch Bowl learned CrowdOut’s intentions, the stockholders essentially voted in a new board and dismissed Haywood. They were approached by Sortis, a private equity firm that purchased Bamboo Sushi out of bankruptcy earlier in 2020. Sortis, which looked at the company during the P.J. Solomon search, lent it $261,500 for the purpose of funding a bankruptcy case.

Punch Bowl Social

Punch Bowl filed bankruptcy on December 21 to stop a foreclosure sale.

“Sortis’ desire was to run the company through a Chapter 11 case and use what is essentially called a ‘cram-up’ plan,’” Gavin says. “They would provide payment for secured lenders’ claims over a number of years with interest. They would provide some mechanism of payment for the unsecured creditors. And through a bankruptcy plan, they would emerge with a restructured Punch Bowl Social business.”

Punch Bowl filed bankruptcy on December 21 to stop the foreclosure sale. CrowdOut was surprised by the filing, yet also wanted to fund the bankruptcy. That meant Punch Bowl faced two options: a certain amount of financing from Sortis in conjunction with a restructuring support agreement that bound Punch Bowl to Sortis’ view of how the case should go, or an unrestricted credit line from CrowdOut to run the bankruptcy case on an interim period while everyone figured out what to do.

In the first few days of the case, Punch Bowl opted to borrow from CrowdOut on an interim basis, but continue to negotiate among the parties for the best offer. In the next week or so, Punch Bowl held conversations with Sortis and CrowdOut over the terms of what a debtor-in-possession financing facility would look like.

“What emerged were two different philosophies of what the bankruptcy case should be,” Gavin says.

Sortis envisioned a plan that would pay CrowdOut off over a number of years and reorganize Punch Bowl’s balance sheet. CrowdOut was a proponent of a quick bankruptcy sale that would run a sales process and find the highest bidder. If no one was willing to outbid CrowdOut’s debt, it would credit bid its debt and complete the sale. A credit bid is when a lender exchanges its claims for equity in an entity.

On the budget side, CrowdOut’s expectations for a business plan were to maintain most of the staff and reopen quickly. Sortis’ budget was predicated on deep staff cuts and drastically reduced expenses. It planned on the availability of more Paycheck Protection Program funding, as well.

In the first week of January, the official committee of unsecured creditors was formed. The committee’s job was to represent the interests of all unsecured creditors in the case, like landlords, for example. Punch Bowl then received a series of offers from Sortis and CrowdOut and negotiated for what it hoped would be the best deal for its estate. At the same time, CrowdOut and Sortis had a number of disagreements, which manifested itself in the form of numerous motions. The two sides never reached a final agreement on debtor-in-possession financing, so a second and third interim financing facility were granted by CrowdOut.

The second to last week of January was a determinative period for the case, Gavin says. There was a pending motion by CrowdOut to shift management of Punch Bowl away from the board of directors in favor of a court-appointed trustee. Gavin says CrowdOut filed the motion because it felt Sortis applied pressure to Punch Bowl and was essentially controlling things. In response, Punch Bowl’s board of directors decided to appoint Gavin chief restructuring officer to overlook the case.

“The debtors’ board of directors determined that at that point, the best thing to do for the case and for the debtor and its stakeholders was to change the face of the bankruptcy case and put in a chief restructuring officer who would have the unfettered authority to run the bankruptcy cases for the debtors, and to solve the question of, is Sortis really running things here,” Gavin says. “They put somebody in place with no connection to Sortis.”

Gavin proceeded to negotiate with CrowdOut and Sortis. Ultimately, Punch Bowl selected CrowdOut to be the final debtor-in-possession lender. It also determined a budget that would take the company through the end of April. Sortis objected, but later withdrew its objection after an hours-long hearing.

CrowdOut received approval to run a sale, and SSG Capital Advisors was hired to facilitate the process. It contemplated the following timeline: indications of interest by mid-February, a bid deadline in early March, and then an auction in mid-March. As it moved forward, CrowdOut declared that it would bid its unsecured debt, valued at roughly $32 million ($21 million owed under the loan and $11.2 million in debtor-in-possession financing). Several other parties expressed interest, but none could match CrowdOut’s bid.

The court approved Punch Bowl’s sale to CrowdOut, but one item that remained unresolved was how the $261,500 loan from Sortis would be treated. The issue was significant because if Sortis was successful in asserting its lien, it’s possible that some proceeds that were to be allocated to unsecured creditors would be given to Sortis instead.

The solution was to sell Sortis some assets that were not associated with the bankruptcy case. These assets were future Punch Bowl locations that were part of the brand’s overall expansion strategy. Sortis’ plan is to utilize PPP financing and use the sites to open new concepts with Thompson.

The plan has been approved by the court and is out to creditors for voting. If no objections, the plan will be confirmed on April 28. Punch Bowl is currently operating two stores in Atlanta and Austin, and will reopen 12 more throughout 2021.

“They are aggressively planning on reopening the stores that were closed during the pandemic just as quickly as local regulations will allow them to,” Gavin says.