Quiznos Files for Chapter 11 Bankruptcy Protection -- 2nd Update

By Jacqueline Palank 

Sandwich chain Quiznos filed for Chapter 11 bankruptcy protection Friday, after reaching a deal to cut its debt by more than $400 million, or about two-thirds.

Quiznos said it would continue operating while it works to implement a debt-restructuring plan and make operational improvements.

"The actions we are taking are intended to enable Quiznos to reduce our debt, execute a comprehensive plan to further enhance the customer experience, elevate the profile of the brand and help increase sales and profits for our franchise owners," Stuart K. Mathis, Quiznos' chief executive, said Friday in a news release.

Court papers show that under the restructuring plan, Quiznos' senior lenders would trade more than $444 million in debt for all of the equity in the restaurant chain, subject to dilution.

The lenders, which have offered $15 million to finance the company's restructuring, also would get $200 million in new debt under the so-called prepackaged bankruptcy plan.

Court papers show about 61% of Quiznos' senior lenders have agreed to support the plan, as have 99% of its junior lenders, owed $173.8 million. Such plans allow for speedier and cheaper Chapter 11 proceedings.

The plan further calls for Quiznos' unsecured creditors, including the junior lenders, to receive equity or a share of any proceeds from litigation against certain "officers, members and related parties" of Quiznos.

Current equity holders like Avenue Capital Management and Fortress Investment Group, which also hold Quiznos' junior debt, would see their shares canceled and wouldn't receive any payment for those shares as part of the restructuring.

Quiznos has asked the U.S. Bankruptcy Court in Wilmington, Del., to approve its restructuring plan at an April 24 hearing.

Quiznos' filing, which The Wall Street Journal previously had reported was in the works, comes two years into a major turnaround effort that included an out-of-court debt restructuring and a management shake-up.

While a Chapter 11 filing will give the company much-needed flexibility on leases and unattractive contracts, Quiznos must repair its damaged relationship with franchise owners, who say they are being squeezed out of business by the high cost of operating a Quiznos outlet.

The maker of toasted subs has shut down thousands of locations in recent years, leaving it with nearly 2,100 locations around the world. All but seven of those are independently owned and operated by franchisees.

Mr. Mathis said Quiznos' go-forward business plan will aim to support franchisees, including reducing food costs, starting a rebate program and financing restaurant improvements.

Emily Glazer contributed to this article.

Write to Jacqueline Palank at jacqueline.palank@wsj.com