Financial sponsor Atlantic Street Capital is preparing to hand over control of portfolio company Zips Car Wash to its direct lenders through a Chapter 11 bankruptcy process, said two sources familiar with the matter.

The filing would mark one of the biggest bankruptcies ever in the private credit space amid rapid growth of the asset class that proponents have touted as less risky than traditional syndicated leveraged finance.

Lenders are set to provide DIP financing to facilitate Zips’ in-court restructuring, the sources said. By filing for bankruptcy rather than handing lenders the keys out of court, Zips and its lenders may be able to tackle preferred shares in the capital structure and reject unwanted leases more easily.

Zips, one of the largest operators of car washes in the US with over 250 locations, has been in negotiations for months with its lenders on how to address the December 2024 maturity on its delayed-draw term loan, Debtwire previously reported.

The company has a roughly USD 1bn capital structure across preferred shares and the term load provided by a group of direct lenders. The loan is priced at SOFR+ 375bps with a 350bps PIK component, according to SEC filings.

Brightwood Capital serves as agent on the term loan and has long been a lender to the company. BDCs managed by HPS, Pennant Park, Onex and Capital Southwest are among the holders of the loan, according to SEC filings.

Paul Hastings is advising lenders on the talks and AlixPartners is also involved in a turnaround capacity, while Evercore and Kirkland & Ellis are working with Zips, as reported.

The negotiations come less than three years after Atlantic Street formed a USD 1.1bn single-asset continuation fund to acquire Zips after initially investing in 2020. The sponsor stepped up to invest an additional USD 70m in June 2024.

Financial sponsors rushed into the car washing space during the COVID-19 pandemic, but many have since learned that it’s much harder than they originally thought to operate the businesses profitably, as reported.

Debtwire reported in November that Zips was working with Kirkland to explore a variety of options with creditors ahead of the maturity on the term loan. The article said Zips could end up being taken over by creditors through an in or out-of-court restructuring process.

When rejecting a lease in Chapter 11, a debtor only needs to show that its decision to reject the lease is an exercise of sound business judgment in order to obtain court approval of the rejection. The standard is relatively low, and is typically easily met by showing the savings that would result to the debtor’s estate upon rejection. A lease rejection is treated as a prepetition breach of the lease, entitling the landlord to a damages claim that is capped by Bankruptcy Code section 502 (b)(6).

Brightwood and Atlantic Street declined to comment. Representatives for Zips did not return requests for comment.