Chilango’s creditors and shareholders have backed a rescue package to keep the struggling Mexican restaurant chain afloat, paving the way for the company to slash rents and exit some leases.
Chilango launched a company voluntary arrangement (CVA) in early December, which was first reported by City A.M., in a bid to avoid administration.
The chain has been struggling to continue trading amid increased operational costs and substantial debts, and is in the process of making both its co-chief executives redundant in a bid to cut costs.
At a meeting in central London this afternoon, the company told shareholders enough creditors had voted in favour of the CVA for it to go ahead.
“We are humbled to have received such strong support from our creditors and shareholders, and appreciate how pragmatic and understanding our stakeholders have been,” said co-founders and former co-chief executives Eric Partaker and Dan Houghton.
Creditors had been given until 3 January to vote on bailout proposals including cutting rent by 40 per cent at three of its 12 restaurants and exiting four leases on dormant sites.
Around 1500 small investors who ploughed £5.8m into Chilango’s two mini-bond offerings are also set to have their investments converted into preferential shares in the company.
Some 84 per cent of creditors backed the bailout proposals related to the wider company, while 98.6 per cent backed the creation of the new shares for bondholders.
Over 700 investors backed Chilango’s first bond raise in 2014, while another offering backed by almost 800 investors closed in April 2019. This second raise was oversubscribed, and exceeded its initial £1m target to raise £3.7m.
Shareholders had been offered the choice between this debt-for-equity swap or cashing out bondholders’ debts at a rate of 10p per pound, but Chilango informed shareholders last week that enough shareholders had backed the former option for it to go ahead.
Although the preferential shares offer the same eight per cent annual return as the burrito bonds, whether payments are made is dependent on Chilango’s success. This means investors are not guaranteed to receive the high returns they were promised when they bought the controversial investment products, which are largely unregulated.
A spokesperson for Chilango also denied reports that that chief executives Partaker and Houghton, who founded the business in 2007, had agreed to step down following pressure from investors, saying that the decision was taken “separate from and before the CVA”.
“In September, Eric and Dan… took the difficult decision to make their co-chief executive roles redundant, and begin the search process for a managing director,” said the spokesperson.
They added that Houghton had stepped down at the end of December, but Partaker would stay on as chief executive until a managing director is appointed. Both men will stay on as non-executive directors of Chilango.
“It’s great news that the CVA has passed, which will hopefully ensure the long term future of the company,” said one Chilango shareholder, who asked not to be named.
“However it’s a disgrace that the company can announce insolvency less than nine months after publicly raising £3m from crowdfunding. I welcome the change in leadership but fear a lot of brand equity has been lost,” they added.
Gordon Thomson, a director at restructuring firm RSM, which has been working with Chilango on the CVA, said the approval of the proposals “ensures the business is well structured to develop further”.
The embattled chain is on the hunt for a financial controller to “responsible for the overall control of all financial aspects” of the company, which has never turned a profit.
Chilango made a loss of £1.4m for the year to March 2018, the most recent period for which figures available, and had dents of £6.9m at the end of October.
The business has also been issued with a strike-off notice from Companies House for failing to file its most recent accounts, which are over three months late.
A Chilango spokesperson said its accounts would be filed once the CVA process was completed and it had informed Companies House of this.