Boston Pizza Royalties Income Fund and Boston Pizza International Inc. Announce a Comprehensive COVID-19 Recovery Plan and the Refinancing Terms of Their Credit Facilities

Toronto Stock Exchange: BPF.UN

VANCOUVER, BC, June 22, 2020 /CNW/ - Boston Pizza Royalties Income Fund (the "Fund")¹ (TSX: BPF.UN) and Boston Pizza International Inc.² ("BPI") announced today that they have reached agreements to holistically address the financial challenges caused by the COVID-19 pandemic including having entered into a pandemic recovery plan among BPI, the Fund and certain of their subsidiaries dated June 22, 2020 (the "Pandemic Recovery Plan").

Highlights

• Jim Treliving, through an entity he controls, investing $10 million of additional capital in BPI to reduce indebtedness and enhance liquidity and cashflow.
• BPI's liquidity and cashflow further strengthened by a $6.25 million credit facility under the Export Development Canada's ("EDC") business credit availability program.
• BPI's liquidity and cashflow further strengthened through a $2 million subordinated credit facility (the "BDC Loan") from the Business Development Bank of Canada ("BDC") under the federal government's COVID-19 relief programs. The BDC Loan is subject to the completion of definitive agreements and customary closing conditions, which the Fund and BPI anticipate will occur by early July 2020.
• BPI's credit facilities restructured to enhance short-term liquidity and address the current challenges faced by BPI with principal repayments waived for the second and third quarters of 2020, financial covenants modified and all historical non-compliance with financial covenants waived.
• The Fund's credit facilities restructured with non-operating credit facilities converted to non-revolving term loans, certain principal repayments to commence in October 2020, financial covenants modified and all historical non-compliance with financial covenants waived.
• Boston Pizza Canada Limited Partnership ("BP Canada LP") to recommence collection of royalty and advertising fees in respect of June 2020 Franchise Sales³ and to collect royalty and advertising fees that were deferred in respect of March, April and May 2020 Franchise Sales over 15 months commencing in September 2020.
• BPI to recommence paying Royalty⁴ and Distribution Income⁴ to the Fund in July 2020 and to repay deferred Royalty and Distribution Income in respect of March 2020 through May 2020 over 15 months commencing in September 2020.
• BPI and the Fund amending the financial covenants under general security agreements granted by BPI to secure payment of the Royalty and Distribution Income to the Fund in a manner intended to ensure that the Fund will have sufficient cash flow to comply with the financial covenants under the Fund's credit facilities and all historical defaults under these covenants waived by the Fund.
• To further enhance BPI's liquidity and cashflow, the Fund to draw down its credit facilities with the Bank by $0.8 million and use such funds to repay BPI $0.8 million of reimbursable charges which will be used by BPI for working capital purposes.
• The Fund intends to reinstate monthly distributions as soon as it is responsible and practicable to do so. The reinstatement of, and the amount and timing of, monthly distributions will be determined by the Trustees of the Fund and will depend upon the stability and amount of Royalty and Distribution Income received by the Fund, the significant uncertainties related to the COVID–19 pandemic and the impact on BPI and the Fund, and other factors.
• The Fund's Trustees to defer meeting fees for special meetings of the Trustees held to deal with COVID-19 issues until September 2020.

Details

The Fund and BPI are pleased to announce a comprehensive COVID-19 recovery plan that is designed to ensure the long-term financial sustainability of BPI and the Fund with a view to preserving and enhancing unitholder value. As previously announced, the effects of COVID-19 on the businesses and financial condition of both the Fund and BPI have been unprecedented, profound and unexpected. The recovery plan announced today is intended to provide BPI the liquidity necessary to satisfy its short-term cashflow needs and strengthen its and the Fund's financial position into the future.

"While the impact of COVID-19 on the underlying Boston Pizza restaurant business continues to evolve, the joint recovery plan agreed to by the Fund, the bank, BPI and its owner provides a clear path forward during these uncertain times," said Marc Guay, Chair of Board of Trustees. "The Trustees will continue to monitor the Fund's and BPI's businesses closely with a view to resuming monthly distributions as soon as it is responsible and practicable to do so".

"The unprecedented turmoil of the past several months has been difficult on the Boston Pizza system as it has been on people around the world," said Jordan Holm, President of BPI. "We are optimistic that the recovery plan announced today will produce a stable and sustainable platform for BPI to move forward and we applaud all stakeholders for their commitment to the Boston Pizza business."

Capital Injection to BPI from Owner

BPI's sole shareholder, a company owned and controlled by BPI's Chairman, Jim Treliving, injected $5 million of capital into BPI to strengthen BPI's balance sheet. In addition, BPI's sole shareholder will make an additional $5 million capital injection not later than October 1, 2020. BPI will use these funds for a combination of reducing long-term indebtedness owing to the Bank and working capital.

Additional Working Capital Financing for BPI under EDC BCAP Program

The Bank has agreed to loan BPI $6.25 million under the EDC's business credit availability program (the "BCAP Loan"). The BCAP Loan may be used to provide additional liquidity to finance operations, and may not be used to: (i) repay or refinance existing debt obligations; (ii) make distributions; or (iii) pay any bonuses or increases to executive compensation. The BCAP Loan has a term of one year, which may be extended annually at the request of BPI for up to five years subject to compliance with certain requirements, requires interest only payments for the first year and is repayable in monthly blended payments of principal and interest amortized over four years commencing after the first year of the term, with any remaining balance outstanding being due upon expiry of the term. The BCAP Loan bears interest at the Bank's prime rate plus 2.5% and is subject to an annual fee equal to 1.8% of the total amount of credit available (i.e. $6.25 million). The BCAP Loan is guaranteed by all of BPI's subsidiaries except BP Canada LP, and is secured by the same security that secures BPI's Credit Facilities (defined below) to the Bank. That security shares priority with the general security agreements granted to the Fund by BPI and its subsidiaries to secure BPI's obligation to pay the Fund Royalty and Distribution Income pursuant to the existing priority agreement between the Fund and the Bank.

Additional Working Capital Financing for BPI from BDC

BDC has offered to loan BPI $2 million under the federal government's COVID-19 relief programs.  The BDC Loan may be used for working capital purposes, will have a term of three years and will be repayable in a combination of monthly payments commencing after the first year of the term and a balloon payment upon maturity. The BDC Loan will bear interest at BDC's floating base rate (currently 4.55% per annum) less 1.75% (i.e. currently 2.80%). The BDC Loan will be secured by a subordinate charge over all of BPI's assets and will be guaranteed by all of BPI's subsidiaries except BP Canada LP. All of BPI's subsidiaries other than BP Canada LP will also grant BDC a subordinate charge over all of their assets to support such guarantees. The security held by BDC will be subordinate to the security held by the Bank to secure BPI's Credit Facilities and the security held by the Fund to secure BPI's obligation to pay the Fund Royalty and Distributions. The BDC Loan is both subject to the completion of definitive agreements and customary closing conditions, which BPI and the Fund anticipate will occur in early July 2020.

Restructuring of BPI's Credit Facilities with the Bank

BPI and BPI's bank (the "Bank", who is also the Fund's bank) amended BPI's $44.0 million credit facilities ("BPI's Credit Facilities") and the credit facilities of one of BPI's wholly-owned subsidiaries (the "F&J Credit Facilities"). BPI's Credit Facilities were comprised of: (i) a $10 million committed revolving facility to cover BPI's day-to-day operating requirements if needed; and (ii) a $34 million committed non-revolving term facility. The F&J Credit Facilities were comprised of a $3.2 million term loan and a $0.1 million committed revolving operating facility. The principal amendments were as follows:

1. The term of BPI's Credit Facilities was shortened to expire on December 31, 2022 instead of January 24, 2025, and the term of the F&J Credit Facilities was shortened to expire on March 31, 2022 instead of January 24, 2025;
2. The interest rates (or margins, as applicable) applicable to BPI's Credit Facilities increased by between 0.50% and 1.75% per annum. In the case of Canadian prime rate loans, the interest rate is now equal to the Bank's prime rate plus between 1.50% and 2.50% (depending on the total funded net debt to EBITDA ratio) and, in the case of bankers' acceptances and Canadian dollar offered rate loans, the interest rate is equal to a variable interest rate based on the Bank's bankers' acceptance rates or Canadian dollar offered rates plus between 2.75% and 3.75% (depending on the total funded net debt to EBITDA ratio);
3. Quarterly principal repayments were waived for the second and third quarters of 2020, after which time they will recommence;
4. Various financial covenants were waived for the remainder of the term, including the requirement that: (a) the market value of the securities BPI holds that are exchangeable for units of the Fund⁵ exceed the amount of indebtedness owed by BPI to the Bank; (b) BPI's net total funded debt to EBITDA be less than specified ratios; (c) BPI maintain a minimum ratio of cash flow available for debt service to total debt service; and (d) BPI maintaining a minimum fixed charge coverage ratio under the F&J Credit Facilities;
5. A new financial covenant was created that requires BPI's trailing 12-month EBITDA to not be less than certain specified values, and will be tested on a quarterly basis; and
6. The $0.1 million committed revolving operating facility under the F&J Credit Facilities was eliminated.

The Bank waived all historical non-compliance with financial covenants.

Restructuring of the Fund's Credit Facilities with the Bank

The Fund and the Bank amended the Fund's $97 million credit facilities (the "Fund's Credit Facilities"). The Fund's Credit Facilities were comprised of: (i) a $2.0 million committed operating facility ("Facility A"); (ii) a $61.7 million committed revolving credit facility issued for the purpose of refinancing previous credit facilities and to facilitate the Fund repurchasing and canceling units of the Fund under normal course issuer bids, substantial issuer bids or to finance the cash component of any exchange of general partnership units of BP Canada LP ("Facility B"); and (iii) a $33.3 million committed revolving credit facility issued for the purpose of subscribing for Class 1 LP Units of BP Canada LP ("Facility D"). The principal amendments were as follows:

1. The term of the Fund's Credit Facilities was shortened to expire on December 31, 2022 instead of January 24, 2025;
2. The interest rates (or margins, as applicable) applicable to the Fund's Credit Facilities were increased by between 0.75% and 1.60% per annum.  In the case of Canadian prime rate loans, the interest rate is now equal to the Bank's prime rate plus between 0.75% and 1.75% (depending on the total funded net debt to EBITDA ratio) and, in the case of bankers' acceptances and Canadian dollar offered rate loans, the interest rate is equal to a variable interest rate based on the Bank's bankers' acceptance rates or Canadian dollar offered rates plus between 2.00% and 3.00% (depending on the total funded net debt to EBITDA ratio);
3. Facility B and Facility D were converted from being committed revolving credit facilities to non-revolving term loans. As a condition to agreeing to the COVID-19 recovery plan, the Bank requires quarterly principal repayments on Facility B commencing in October 2020 to reduce the leverage level of the Fund over time as follows: $0.7 million in the fourth quarter of 2020; $1.0 million in each of the first three quarters of 2021; $0.7 million in the fourth quarter of 2021; and $0.5 million in each subsequent quarter for the balance of the term. Facility D continues to require interest-only payments;
4. Various financial covenants were deleted, including the requirement that: (a) the Fund's net total funded debt to EBITDA be less than specified ratios; and (b) the actual cash distributed to holders of units of the Fund not exceed certain amounts; and
5. A new financial covenant was created that requires the Fund's total funded net debt to EBITDA ratio to not exceed 3.25:1 on closing, increasing immediately to not exceed 3.75:1 after closing, further increasing to not exceed 4.25:1 on October 1, 2020, reducing to not exceed 3.50:1 on June 30, 2021 and reducing further to not exceed 3.00:1 on and after September 30, 2021.
6. The Bank waived all historical non-compliance with financial covenants.

Royalty, Distribution Income, Advertising Fees / Amendments to GSA

To support Boston Pizza franchisees, as previously announced, BP Canada LP temporarily suspended collection of royalty and advertising fees from its franchisees commencing with the amounts that would have been payable in April 2020 in respect of Franchise Sales generated in March 2020. Consistent with many other franchisors, the deferral of royalties and advertising fees was made in order to provide its franchisees with financial support during the challenging times caused by the COVID-19 pandemic. Boston Pizza franchisees are required to pay BP Canada LP a 7% royalty on Franchise Sales and a 3% advertising fee on Franchise Sales. This temporary suspension of collecting royalty and advertising fees was a breach of BPI's obligations under the license and royalty agreement between the Fund and BPI governing, among other things, payment of the Royalty.

BPI advised its franchisees that BP Canada LP will recommence collecting royalty and advertising fees from its franchisees in respect of Franchise Sales occurring from and after June 1, 2020, and will collect the deferred royalty and advertising fees in respect of Franchise Sales occurring between March 1, 2020 and May 31, 2020 over 15 months without interest commencing in September 2020. BPI's management believes that this approach achieves an appropriate balance between BPI's need to generate cashflow and providing support to franchisees in challenging times. BPI will continue to work diligently to build a consortium of financial relief and support for its franchisees across financial institutions, governments, landlords, and others that together will be required to provide assistance at a level needed to help offset the otherwise unprecedented financial impact facing Boston Pizza restaurants and BP Canada LP's many franchisees.

BPI and BP Canada LP delayed payment of Royalty and Distribution Income to the Fund in respect of March 2020 through May 2020, but had advised the Fund that they will pay such amounts in the future with interest. BPI will recommence paying Royalty and Distribution Income to the Fund on a current basis commencing in respect of June 2020, which will be payable in July 2020, and will repay historical Royalty and Distribution Income that it did not pay in respect of March 2020 through May 2020 in equal monthly instalments (of principal and interest) over 15 months with interest at the annual rate equal to the prime rate for commercial loans offered by the Bank plus 2% commencing in September 2020.

The Fund waived historical non-compliance with BPI's obligation to pay Royalty and Distribution Income in respect of March 2020 through May 2020 and with BPI's obligation to collect royalty and advertising fees from BP Canada LP's franchisees.

As previously announced, BPI was not in compliance with certain financial covenants under the general security agreements granted to the Fund to secure BPI's obligation to pay the Fund Royalty and Distribution Income. Specifically, the general security agreements required BPI to not exceed a specified debt-to-EBITDA ratio. BPI, BP Canada LP and the Fund have amended that covenant to provide: (i) that BPI's trailing 12-month EBITDA must not be less than certain specified values until expiry of BPI's Credit Facilities and will be tested quarterly; (ii) upon BPI's Credit Facilities being renewed or refinanced, BPI's financial covenants to the Fund will mirror those contained in the renewed or refinanced credit agreement, and upon expiry of those renewed credit facilities or if no such renewal or refinancing occurs, BPI's total funded debt to EBITDA ratio must be less than 2.5:1. In addition, the Fund and BPI created a new financial covenant that requires BPI and BP Canada LP to pay the Fund each quarter until December 31, 2022 a minimum amount of Royalty and Distribution Income. This new covenant is intended to ensure that the Fund will have sufficient cash flow to comply with the financial covenants under the Fund's Credit Facilities.  This will be calculated on a trailing 12-month basis and tested quarterly. The Fund waived historical non-compliance with the covenants under such general security agreements.

Repayment of Reimbursable Charges

The Fund has engaged Boston Pizza Royalties Limited Partnership ("Royalties LP"), its administrator, to provide certain administrative services on behalf of the Fund ("Administrative Services"). In turn, certain of the Administrative Services are performed by BPI as a general partner of Royalties LP. Under the terms of the partnership agreement governing Royalties LP, BPI is entitled to be reimbursed for certain out-of-pocket expenses incurred in performing the Administrative Services. Royalties LP and BPI had previously agreed that for 2018 and 2019, BPI would charge Royalties LP $0.4 million of annual out-of-pocket expenses for which it is entitled to be reimbursed but that Royalties LP would defer payment of such amount to BPI (the "Deferred Amount"). The Deferred Amount was not to bear interest and was to become payable to BPI when the Fund's cash and cash equivalents is greater than 7% of Royalty and Distribution Income.

The Fund will draw down Facility B with the Bank by $0.8 million and use such funds to repay BPI the Deferred Amount, which BPI will use for working capital purposes. BPI and the Fund agreed to limit the annual amount of out-of-pocket expenses for which BPI is entitled to be reimbursed to not more than $0.4 million for 2020, 2021 and 2022, with such limit increasing by not more than the percentage change in the Canadian Consumer Price Index (as calculated by Statistics Canada) in the calendar year prior thereafter.

Distributions to Unitholders

As previously announced, the Fund suspended distributions to Unitholders until further notice commencing with the April 2020 distribution. The Fund intends to reinstate monthly distributions as soon as it is responsible and practicable to do so. The reinstatement of, and the amount and timing of, monthly distributions will be determined by the Trustees of the Fund and will depend upon the stability and amount of Royalty and Distribution Income received by the Fund, the significant uncertainties related to the COVID–19 pandemic and the impact on BPI and the Fund, and other factors.

Deferral of Trustee Fees

In light of the difficulties facing the Fund and its unitholders, the Fund's Trustees have agreed to defer meeting fees for special meetings of the Trustees held to deal with COVID-19 issues until September 2020.

Full particulars of the comprehensive COVID-19 recovery plan are contained in the Pandemic Recovery Plan and other documents referenced in this press release, a copy of which is available on www.sedar.com.

1)	The Fund includes, where applicable, its subsidiaries, including Boston Pizza Holdings Limited Partnership and Boston Pizza Royalties Limited Partnership.
2)	BPI includes, where applicable, its subsidiaries, including Boston Pizza Canada Limited Partnership.
3)	"Franchise Sales" is the basis upon which Royalty and Distribution Income are payable, and means the gross revenue: (i) of the corporate Boston Pizza restaurants in Canada owned by BPI that are in the Fund's royalty pool; and (ii) reported to BP Canada LP by franchised Boston Pizza restaurants in Canada that are in the Fund's royalty pool, without audit or other form of independent assurance, and in the case of both (i) and (ii), after deducting revenue from the sale of liquor, beer, wine and revenue from BP Canada LP approved national promotions and discounts and excluding applicable sales and similar taxes. Nevertheless, BP Canada LP periodically conducts audits of the Franchise Sales reported to it by its franchisees, and the Franchise Sales reported herein include results from sales audits of earlier periods.
4)	The Fund indirectly owns the Boston Pizza trademarks and trade names used by Boston Pizza restaurants in Canada. In 2002, the Fund licensed these trademarks to BPI for 99 years and in return BPI pays the Fund a top line royalty of 4% of franchise revenues of Boston Pizza restaurants in the Royalty Pool ("Royalty"). On May 6, 2015, the Fund completed an indirect investment in BP Canada LP (a limited partnership controlled and operated by BPI) that entitles the Fund to receive distribution income from BP Canada LP ("Distribution Income") equal to 1.5% of franchise revenues of Boston Pizza restaurants in the Royalty Pool less the pro rata portion payable to BPI in respect of its retained interest in the Fund.
5)	BPI indirectly holds Class B General Partner Units of Boston Pizza Royalties Limited Partnership and Class 2 General Partner Units of BP Canada LP that are currently exchangeable for approximately 3.2 million units of the Fund.

Forward Looking Information

Certain information in this press release constitutes "forward-looking information" that involves known and unknown risks, uncertainties, future expectations and other factors which may cause the actual results, performance or achievements of the Fund, Boston Pizza Holdings Trust, Boston Pizza Royalties Limited Partnership, Boston Pizza Holdings Limited Partnership, Boston Pizza Holdings GP Inc., Boston Pizza GP Inc., BPI, BP Canada LP, Boston Pizza Canada Holdings Inc., Boston Pizza Canada Holdings Partnership, Boston Pizza restaurants, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. All statements, other than statements of historical facts, included in this press release that address activities, events or developments that the Fund, its Trustees, BPI or its management expect or anticipate will or may occur in the future, including such things as, BPI's sole shareholder investing an additional $5 million of capital in BPI before October 1, 2020 to reduce indebtedness and enhance liquidity and cashflow, BPI obtaining $6.25 million and $2 million of additional financing from EDC and BDC, respectively, to strengthen its liquidity and cashflow, that completion of definitive agreements and customary closing conditions in respect of the BDC Loan will occur by early July 2020, BP Canada LP will collect the royalty and advertising fees that were deferred in respect of Franchise Sales occurring between March 1, 2020 and May 31, 2020 over 15 months commencing in September 2020, BPI recommencing paying Royalty and Distribution Income to the Fund commencing in July 2020, BPI repaying historical Royalty and Distribution Income that it did not pay the Fund in respect of March 2020 through May 2020 over 15 months with interest commencing in September 2020, the Fund drawing down its credit facilities with the Bank by $0.8 million and using such funds to repay BPI $0.8 million of reimbursable charges which BPI will use for working capital purposes, the Fund re-instating monthly distributions to Unitholders as soon as it is responsible and practicable to do so, the recovery plan providing BPI the liquidity necessary to satisfy its short-term cashflow needs and strengthening its and the Fund's financial position into the future, the recovery plan providing a clear path forward during these uncertain times, the Trustees continuing to monitor the Fund's and BPI's businesses closely with a view to resuming monthly distributions as soon as it is responsible and practicable to do so, BPI being optimistic that the recovery plan will produce a stable and sustainable platform for BPI to move forward, BPI's management believing that recommencing the collection of royalty and advertising fees from franchisees in respect of Franchise Sales occurring from and after June 1, 2020 and collecting the deferred royalty and advertising fees in respect of Franchise Sales occurring between March 1, 2020 and May 31, 2020 over 15 months without interest commencing in September 2020 achieves an appropriate balance between BPI's need to generate cashflow and providing support to franchisees in challenging times, and that BPI will continue to work diligently to build a consortium of financial relief and support for its franchisees across financial institutions, governments, landlords, and others that together will be required to provide assistance at a level needed to help offset the otherwise unprecedented financial impact facing Boston Pizza restaurants and BP Canada LP's many franchisees are forward-looking information. When used in this press release, forward-looking information may include words such as "anticipate", "estimate", "may", "will", "expect", "believe", "plan", "should", "continue" and other similar terminology. The material factors and assumptions used to develop the forward-looking information contained in this press release include the following:  the tems of the financing to be received from EDC and BDC being settled on terms acceptable to BPI and in a reasonable timeframe, Boston Pizza franchisees having sufficient liquidity to repay royalty and advertising fees that were deferred in respect of Franchise Sales occurring between March 1, 2020 and May 31, 2020, and the amount of Royalty and Distribution Income received by the Fund being stable and of a sufficient amount that, and the negative impact of COVID-19 on the business of Boston Pizza and its franchisees dissipating sufficiently such that, the Trustees are of the view that resuming monthly distributions in a timely fashion is responsible and practicable. Risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievement expressed or implied by the forward-looking information contained herein, relate to (among others) competition, demographic trends, consumer preferences and discretionary spending patterns, business and economic conditions, legislation and regulation, reliance on operating revenues, accounting policies and practices, the results of operations and financial condition of BPI, BP Canada LP and the Fund, the unknown future impact of COVID-19, as well as those factors discussed under the heading "Risks and Uncertainties" in the most recent Annual Information Form of the Fund. This information reflects current expectations regarding future events and operating performance and speaks only as of the date of this press release. Except as required by law, neither the Fund nor BPI assumes any obligation to update previously disclosed forward-looking information. For a complete list of the risks associated with forward-looking information and the Fund's and BPI's business, please refer to the "Risks and Uncertainties" and "Note Regarding Forward-Looking Information" sections included in the most recent Annual Information Form of the Fund available at www.sedar.com and www.bpincomefund.com.

The Trustees of the Fund have approved the contents of this news release.

® Boston Pizza Royalties Limited Partnership. All Boston Pizza registered Canadian trademarks and unregistered Canadian trademarks containing the words "Boston", "BP", and/or "Pizza" are trademarks owned by the Boston Pizza Royalties Limited Partnership and licensed by the Boston Pizza Royalties Limited Partnership to Boston Pizza International Inc.

SOURCE Boston Pizza Royalties Income Fund

Michael Harbinson, Chief Financial Officer; Paulina Hiebert, Trustee; Tel: [phone], E-mail: [email protected], www.bpincomefund.com

Related Links

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