Pizza Hut’s largest U.S. franchisee, NPC International Inc., could be headed for bankruptcy, according to a recent report from Bloomberg. The company, grappling with sales declines and store closures, is exploring restructuring options.

Bloomberg said NPC has $1 billion of debt and started negotiating with lenders after months of soft performance. The publication cited “people familiar with the situation” who asked not to be identified.

The company hopes to keep its restructuring out of court, per the report, but is weighing the possibility of Chapter 11 with a pre-negotiated plan in place.

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NPC operates roughly 1,600 restaurants, including more than 1,225 Pizza Huts and 385 Wendy’s. Pizza Hut ended Q4 with 7,306 domestic locations after closing 136 units and opening 52 others in the period.

NPC recently defaulted on about $800 million of debt after it elected to skip loan payments, Bloomberg said.

NPC then entered into a forbearance agreement with lenders.

The franchise company is backed by private investment firm Eldridge Industries LLC. Bloomberg said NPC is working with restructuring advisers at law firm Weil Gotshal & Manges, as well as investment bank Greenhill & Co and operational adviser AlixPartners LLP.

NPC’s ongoing discussions center on finding a restructuring path that doesn’t involve bankruptcy. If the company does go that route, however, the filing would help renegotiate leases with landlords, Bloomberg said.

Spokeswoman Virginia Ferguson told the publication in a statement: “While we don’t comment on rumors and speculation or on specific situations with individual franchisees, Pizza Hut U.S. is in constant partnership with our franchisees across the country, including those facing challenges, to make sure we have the healthiest franchise system possible to grow and strengthen the brand.”

On Wednesday, Moody’s Investors Service lowered NPC’s credit rating by three notches and said January’s skipped interest payments “were tantamount to default.” The company choice not to make January 31 interest payments on its first and second-lien loans, sources told Bloomberg. It signed forbearance agreements with creditors that suspended interest payments on its first-lien debt and allowed more time for negotiations. Earlier in 2020, NPC received a new $25 million loan, Bloomberg said. The terms of the “super-priority loan,” provided by existing lenders and used to improve liquidity, prevented NPC from making payments on the second-lien term loan.

According to Bloomberg, NPC informed lenders it would suspend payments on most outstanding debt to preserve cash. Same-store sales dropped 2.5 percent at NPC’s Pizza Hut base this past quarter, the sources said. The company’s EBITDA fell 16 percent, year-over-year, to $16.2 million.

NPC’s Q3 results, released in November, showed a debt-to-earnings ratio of 7.66 times.

Quotes on NPC’s first-lien loan due 2024, per Bloomberg, are below 48 cents on the dollar. Its second-lien loan due the following year trades at less than 5 cents on the dollar.

In Q4, Pizza Hut experienced an uptick in bad debt expense, the company revealed to investors during Yum!’s annual and quarterly review. Bad debt expense related to royalties and digital fees was $8 million for the global division, up $4 million year-over-year. For the full year, it was $22 million, an increase of $12 million.

Yum! Brands CFO Chris Turner said on a conference call this was related “to just a handful of franchisee situations.” This is something Yum! brought up in recent months as it mentioned there being some overleveraged operators in the system. Some who “simply aren’t the right operating partner for us to grow this brand,” former CEO Greg Creed, who retired at year’s end, previously said.

Essentially, there are some franchisees without the capital, and some who have too much debt, to relocate or remodel units the way Yum! aims to. Pizza Hut continues to work toward a more delivery, carry-out friendly fleet as its dine-in and off-premise businesses move in opposite directions.

“We do have a handful of situations where we are working with the franchisees to get them into a better place,” Turner added. “Obviously, each of those processes take time and do create some choppiness.”

The company also noted on the call there was potential for more sales pressure in the near-term primarily related to its “largest franchisee.” When asked to elaborate by analyst David Tarantino, Turner said Yum! typically does not go into detail on specific franchisee situations. He said the majority of the brand’s operators “are really good partners.”

Whether that was in reference to NPC or not is uncertain.

Pizza Hut’s domestic same-store sales declined 4 percent in Q4, year-over-year. They rose 1 percent in Q4 2018 and 2 percent in Q4 2017. The two comparable Q4s prior—2016 and 2015—Pizza Hut’s U.S. same-store sales fell 4 percent and gained 2 percent, respectively.