This article originally appeared in CoStar News written by Candace Carlisle on October 9, 2020, quoting Eric Horn. It is reprinted here with permission from CoStar News.

No would-be buyers have stepped forward to purchase Chuck E. Cheese and Peter Piper Pizza parent CEC Entertainment in a pandemic-driven bankruptcy, prompting attorneys for the Texas-based chain to pivot to a debt-for-equity swap with existing lenders to get out of a situation more U.S. restaurants are facing.

The move by the chain known for its animated rodent mascot, arcades and pizza-filled parties echoes a bigger trend in the industry of investors losing their appetite in backing eateries reliant on foot traffic and crowds in the pandemic. Casual eateries attempting to work through bankruptcy court in hopes of emerging as viable businesses include Pizza Hut’s largest franchisee, Ruby Tuesday and Sizzler. California Pizza Kitchen also told a U.S. bankruptcy judge no buyers were interested in its business.

For Chuck E. Cheese, unable to operate its lucrative arcades in many U.S. states, it seems a sale in Chapter 11 bankruptcy with a reserve price of $875 million, a price tag set by first lien lenders, it was too high for potential buyers.

Without investor funding, restaurants, often left unable to operate at profitable levels in a pandemic, face an uphill battle in terms of landing a buyer in bankruptcy court, said Eric Horn, an attorney at A.Y. Strauss, a New Jersey-based law firm. Horn isn’t involved in the CEC Entertainment bankruptcy case but is familiar with the lack of investor interest in restaurant and retail bankruptcy cases.

“In the past, there may have been interest, but in the pandemic, restaurants are closing left and right,” Horn said in an interview. “By doing a debt-for-equity swap, it helps creditors hang onto the asset and potentially sell when the market for these assets improve. Restaurants are in dire straits right now. Investors are just not interested in purchasing assets unless they have a vested interest.”

As of a month ago, CEC Entertainment had 570 Chuck E. Cheese stores and 122 Peter Piper Pizza stores. About 17% of the Chuck E. Cheese venues are franchised, compared with about 73% for Peter Piper Pizza. The remaining venues are operated by the company’s corporate entity. Most of the company-operated venues are open, though not all locations have reopened with varying government mandates throughout the United States.

The valuation of the debt-for-equity swap with first lien lenders is still unknown, with those details expected to be unveiled at a yet-to-be-scheduled court hearing in early November in the U.S. Bankruptcy Court for the Southern District of Texas in Houston.

The revised exit strategy continues to “not discourage, but encourage” potential buyers with lucrative offers to come forward, said Matthew Barr, an attorney with Weil Gotshal representing CEC Entertainment in its bankruptcy case. But moving forward with a debt-to-equity swap ensures CEC Entertainment can “move forward in a streamlined, clean process” toward emerging from bankruptcy.

Judge Marvin Isgur approved a motion Friday granting CEC Entertainment the ability to tap $200 million in debtor-in-possession financing from certain first lien lenders to support its ongoing business operations and reorganization efforts. In granting the motion, Judge Isgur said the company showed him the loan was needed to continue working through the bankruptcy process.

CEC Entertainment will use the funds to pay its reorganization expenses and to support its business operations as it works toward a confirmation of a reorganization plan and exit from bankruptcy.

“The company and its board of directors are moving forward with a debt-for-equity exchange pursuant to the plan support agreement agreed to by holders of in excess of 87% of the obligations outstanding under the first lien credit agreement,” CEC Entertainment officials said in a prepared statement. “The company remains receptive to any opportunities for maximizing its value on emergence.”