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Related documents:
Petition
First day declaration
Disclosure statement
Plan of reorganization
Zips Car Wash is looking for a quick stay in chapter 11 after lining up a pre-negotiated plan of reorganization that sets up a debt-for-equity swap with its secured lenders and reduces the company’s funded debt load by $279mn.
The Atlantic Street Capital-backed chain, which grew from two locations in 2004 to 260 at the petition date, enters bankruptcy with just $1mn in cash on hand. Zips has $82.5mn in debtor-in-possession (DIP) financing that requires it to secure plan confirmation by April 11.
The US Bankruptcy Court for the Southern District of Texas has not yet assigned a judge to the case or scheduled a first-day hearing to consider the DIP and other operational motions.
The business
Founded in 2004 with just two locations in Arkansas, Zips massively scaled up its operations from 2015 to 2019 through a spree of 40 acquisitions.
The company generates revenue through a pay-per-wash model at a rate of $12 to $30 per wash, along with its Unlimited Wash Club, a monthly wash subscription service with a mobile application. The wash club has 625,000 members. As of the petition date, the company had 260 locations and 1,800 employees.
Atlantic Street Capital bought a majority share of the company’s equity in 2020 and funded the company with equity financing rounds totaling $152.5mn over the next two years. Atlantic acquired the company’s remaining equity in 2022. Through its car-wash acquisitions, the company’s revenue rose to $345mn in 2022 from $13mn in 2015 to $150mn in 2020.
Source: First-day declaration
Beyond the equity financing, Zips in 2016 entered a secured term loan agreement with various lenders and Brightwood Loan Services as agent. At the petition date, Zips owed $653.9mn on the term loan.
Source: First-day declaration
The company also owes millions to general unsecured creditors. The largest unsecured creditor, Sonny’s Enterprise, is the company’s primary supplier of chemicals, equipment, maintenance services and training programs, according to court filings.
The road to chapter 11
Zips’ debt has become expensive due to rising interest rates over the past few years, with annual cash interest expense spiking to $93mn per year from $59mn, according to the first-day declaration of Chief Transformation Officer Kevin Nystrom. The need to throw more cash at debt service limited cash flow and hurt Zips’ ability to complete further M&A deals.
Zips cites general macroeconomic headwinds for its financial troubles, including inflation, labor shortages, softened discretionary consumer spending and a burdensome lease portfolio. The company also faces a competitive market, with nearly 1,000 new car washes having opened over the past half decade, Nystrom said.
Despite negotiating savings with its vendors and launching a program to refurbish its locations, Zips continued to struggle in the face of its larger balance-sheet issues, including the maturity of its term loan at the end of 2024. The company reached out to Atlantic and its lenders, and Atlantic agreed to provide another $30mn in equity financing while lenders consented to an extension of the loan maturity to March 1, 2025.
Zips brought in Evercore Group in early 2024 to explore refinancing, but it was unable to find a deal and proceeded to hire Kirkland & Ellis and AlixPartners in the summer of 2024 to explore strategic alternatives. After hiring Hilco Real Estate late in the year, Zips lined up a sale of its Orlando, Florida, assets to El Car Wash for $58.5mn. The company plans to close that sale during the chapter 11 case.
The lender talks evolved into a pre-negotiated chapter 11 plan of reorganization, and facing a liquidity crisis, Zips filed for chapter 11 on Feb. 5.
The restructuring
The company’s prepetition lenders have agreed to fund the case with $82.5mn in DIP financing, consisting of $30mn in new money and a rollup of prepetition term loan debt.
The plan of reorganization, backed by 100% of the company’s lenders and its shareholders, proposes to slash the funded debt load by $279mn while cutting millions of dollars in lease liabilities. Zips would reload its balance sheet with a new $150mn HoldCo facility, $225mn OpCo facility and $15mn revolver.
General unsecured creditors would receive no recovery. Atlantic is set to receive a release of claims for pre-bankruptcy actions under the plan.
The DIP sets a series of milestones for the case, including an April 11 deadline to secure plan confirmation.
Pat Holohan
patrick.holohan@levfininsights.com
+1 917 654 0337
