Aug. 18 (Bloomberg) -- Uno Restaurant Holdings Corp. had its credit ratings cut two levels to ``default'' by Standard & Poor's after the owner of the Uno Chicago Grill chain of more than 200 pizzeria restaurants missed a bond payment.

The downgrade to D, the lowest level, from CC, follows West Roxbury, Massachusetts-based Uno's failure to make an Aug. 15 debt payment on its $142 million of notes, S&P said today in a statement.

The worst housing slump since the Great Depression and higher gasoline prices are pinching customers of so-called casual dining restaurants. Pizza chain Sbarro Inc. may breach loan agreements, according to S&P. Midland Food Services LLC, which runs 92 Pizza Hut restaurants, sought protection from creditors this month, blaming a slowing economy and minimum-wage increases.

``Restaurants are very consumer sensitive and with the price of gas and the mortgage crisis, consumers have been scaling back their discretionary consumption,'' Christopher Garman, the head of independent research firm Garman Research LLC in Orinda, California, said in a telephone interview last week.

Uno has 30 days after the interest was due to make a payment before an ``event of default'' occurs, Jackie Oberoi, a debt analyst at S&P in New York, wrote in the statement. ``Given the company's weak liquidity and operating trends, we do not expect it to make the payment,'' Oberoi wrote.

Industry Decline

Uno has the ``liquidity and resources to make the payment now,'' Louie Psallidas, senior vice president and chief financial officer, said today in a telephone interview. The company is using a 30-day grace period to negotiate with bondholders. If there's no agreement by then, Uno ``will make the payment,'' he said.

Uno is faring better than its competitors amid an industry decline, and its problems are more related to its balance sheet than to sales, he said.

Uno's $142 million of 10 percent senior secured second-lien notes due 2011 are quoted at 44 cents on the dollar, according to Merrill Lynch & Co. data.

Uno sold the bonds in 2005 to fund its buyout by Centre Partners Management LLC in New York, according to S&P. Uno has debt equivalent to 10 times its cash flow, the ratings company said in a report Aug. 12. The company has hired Los Angeles-based restructuring adviser Houlihan Lokey to look at ``strategic alternatives'' that may include raising new capital.

Sbarro

Lower consumer spending and fewer customers at the mall are hurting Sbarro, the Melville, New York-based chain bought by buyout firm MidOcean Partners in January 2007, S&P wrote in an Aug. 11 report. Sbarro may breach covenants on $208 million of bank lines, according to S&P.

Sbarro's bonds have dropped 6.25 cents to 72.5 cents on the dollar since S&P lowered its rating one step to CCC+, seven levels below investment grade, from B-. The $150 million of 10.375 percent notes due in 2015 yield 17.7 percent, according to Trace, the Financial Industry Regulatory Authority's bond pricing service.

Anthony Puglisi, Sbarro's chief financial officer, didn't return telephone calls seeking comment.

The proportion of companies reneging on junk bond agreements may reach 6.3 percent in 12 months, the most in more than five years, and may be higher in a prolonged recession, Moody's Investors Service said in a report Aug. 7. The default rate increased to 2.5 percent in July from 1.5 percent a year ago.

Buffets Holdings Inc., the Eagan, Minnesota-based operator of 127 restaurants, filed for Chapter 11 protection from creditors in January.

High-yield, high-risk, or junk, debt is rated below Baa3 by Moody's Investors Service and BBB- by S&P.

To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net

Last Updated: August 18, 2008 16:07 EDT