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Sbarro filing for Chapter 11 bankruptcy protection

MELVILLE, N.Y. — Pizza and pasta chain Sbarro Inc. said Monday it is filing for Chapter 11 bankruptcy protection as it works to restructure.

The restaurant chain has suffered, like many restaurants, since consumers clamped down on spending in the recession. It’s also strapped by debt it took on when private-equity firm MidOcean Partners bought it in 2007.

The filing was expected, as reports emerged last week that the Melville, N.Y., company was considering such action.

Sbarro said it has reached a deal with lenders and noteholders on a reorganization plan that will get rid of about $200 million of its debt, which covers more than half of its total debt.

Sbarro is also seeking approval from the U.S. Bankruptcy Court for the Southern District of New York for a $35 million bankruptcy financing agreement with certain existing first-lien lenders. The company says that the financing, combined with its existing cash flow from operations, would give it enough liquidity to meet its operating expenses and maintain normal operations.

“We believe this plan represents the best opportunity for Sbarro to clear a path for future growth by restructuring its debt in an effective and timely manner,” Interim President and CEO Nicholas McGrane said in a statement.

Sbarro’s financial difficulties have been going on for a while. On March 3, lenders temporarily agreed for a third time not to foreclose on the company’s assets in order to recover $176.3 million in debt as Sbarro tried to regain its final footing. According to the agreements, which the company filed with the Securities and Exchange Commission, Sbarro had missed interest payments and fallen out of compliance with some debt covenants but disputed a default notice it received.

That forbearance agreement expired Friday.

For the first nine months of 2010, Sbarro recorded a loss of $29.3 million and revenue of $228.7 million, according to a company filing.

Sbarro is being advised by Kirkland & Ellis LLP and Rothschild Inc.

The company has more than 1,000 locations in more than 40 countries. Sbarro said it would continue to operate as usual during the restructuring process.