🚜New Chapter 11 Bankruptcy Filing - Tea Olive I LLC (d/b/a Stock+Field)🚜

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Tea Olive I LLC (d/b/a Stock+Field)

The #retailapocalypse is indiscriminate. Sometimes it likes to take down big prey like J.C. Penney or J. Crew but other times it just wants to snag some low hanging fruit via the path of least resistance. That means that a number of retailers those of us in our bubbles in major coastal cities have maybe never heard of will find their way into a bankruptcy court. And a bankruptcy court outside of Delaware or Texas no less.

Like Tea Olive I LLC (d/b/a Stock+Field) for instance. The Minnesota-based “farm, home and outdoor retailer” operates 25 stores across the mid-West. It only sells “a small amount of products…online.” While that’s obviously pretty lame, this place seems like a smorgasbord of fun: in one fell swoop you can go in and pick up, among other things, some dog food, a kayak, some beekeeping equipment, some lawn fertilizer, workwear and apparel, a grill, paint, a new HVAC unit, auto parts, food, toys and firearms! A Christmas bonanza, this place must be! Earl Jr. can get himself a little toy gun while Big Earl can get himself a grenade launcher and AR-15. Everybody wins!

Well, not everybody. Unfortunately, the place is liquidating, a sad post-holidays result for the 1,000 full and part-time employees that work there.

In 2018, the debtor did $176mm of revenue and adjusted EBITDA of $5.1mm. In 2019, to differentiate itself from other unrelated “Big R” entities in the US, the debtor changed its name from “Big R Stores” to “Stock+Field” expecting some short-term drops in performance but expecting those drops to be mere blips on the road to a stronger future. And, in fact, the company did suffer a small drop in performance: it did $173.9mm in revenue and $1.6mm in adjusted EBITDA. 2020 was supposed to be the year.

Spoiler alert: it wasn’t. Not for literally anybody on the planet (well, other than maybe Elon Musk, Joseph Biden, fans of Brexit…ah…you get the idea…there are exceptions to literally everything). Per the company:

In the beginning of 2020, the Debtor continued its rebranding efforts and expected the business to grow throughout the year. However, the Covid-19 pandemic unexpectedly upset all expectations for 2020. All of the Debtor’s 25 stores were open under strict capacity and operating hour restrictions due to the pandemic. Additionally, the pandemic itself has altered the shopping behaviors of the Debtor’s consumers, with some customers not feeling comfortable entering physical stores to shop. While the Debtor sells some products online, the majority of its products are sold solely in stores.

😬Apparently they didn’t get the omni-channel memo. For fiscal year 2020, therefore, the debtor estimates $141.5mm in revenue and -$2.2mm in adjusted EBITDA. Consequently, the company hired restructuring professionals to pursue a financing options and/or a sale. But had no luck. The company then hired Tiger Capital Group to pursue liquidation. Get ready for…

The debtor owes $29.7mm to its senior secured lender, CIT Northbridge Credit LLC pursuant to a credit agreement entered into in early March 2020. Query how seriously the various parties were taking COVID-19 given the timing. Still, the debtor estimates its inventory value to be $45.6mm and it also has $734k of A/R and prepaid assets against $26.5mm in trade debt (inclusive of approximately $1mm in 503(b)(9) claims).* The size of general unsecured creditor recoveries — certain to be less than 100% — will definitely depend on whether there are shoppers out there who are willing to risk contracting COVID-19 simply to hit the bid on that alleged $45.6mm in inventory value.

One question that also arises with retail cases is what happens with gift cards? It appears the debtor intends to honor outstanding gift cards until February 8, 2021. Hurry out, y’all, and get yourself some new toys and firearms just in time for the Civil War.

*For the uninitiated, the Bankruptcy Code provides that suppliers of goods delivered to a debtor in the ordinary course of business in the 20 days prior to a petition date be allowed as administrative expenses.

PETITION is a digital media company that provides curated content, analysis and commentary about distressed investing, bankruptcy and restructuring. We discuss disruption from the vantage point of the disrupted. For “all-access” to our content, lease visit us here.

Date: January 10, 2020

Jurisdiction: D. of Minnesota (Judge Fisher)

Capital Structure: $29.7mm funded secured debt (Second Avenue Capital Partners LLC)

Company Professionals:

  • Legal: Fredrikson & Byron PA (Clinton Cutler, James Brand, Steven Kinsella, Samuel Andre)

  • Restructuring Advisor: Clear Thinking Group (Michael Wesley)

  • Liquidator: Tiger Capital Group LLC

  • Investment Banker: Steeplechase Advisors LLC (James Cullen, Dan O’Rourke, David Burke, Nate Anderson, Eddie Doherty, Amy Rose)

  • Claims Agent: Donlin Recano (Click here for free docket access)

Other Parties in Interest:

  • Secured Loan Agent: Second Avenue Capital Partners LLC

  • Secured Lender: CIT Northbridge Credit LLC

    • Legal: Riemer & Braunstein LLP (Steven Fox)

New Chapter 11 Bankruptcy Filing - Stein Mart Inc. ($SMRT)

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Stein Mart Inc.

Man. This story sucks. Stein Mart Inc. ($SMRT), a publicly-traded specialty off-price retailer with 281 stores across the Southeast, Texas, Arizona and California is the latest retailer to file bankruptcy (along with two affiliates).

To set the stage, imagine Han and Lando taking a fun little ride on a desert skiff. Suddenly a riot breaks out and amidst the confusion Lando falls off the skiff. Luckily, Han is able to grab Lando’s hand so that Lando doesn’t plummet into the gnarley tentacles of some strange sand beast that randomly happens to be there. As Han pulls Lando up out of reach of the beast, all of the sudden some crazy space virus flows through the airspace and smacks Han straight in the lungs. As he clutches his throat struggling to breathe, he releases Lando who consequently hurls straight down towards the beast and suffers a horrific death.

Now replace (a) Han with Kingswood Capital Management LLC, (b) Lando with Stein Mart, and (c) the “crazy space virus” with COVID-19 and you’ve basically got the story of Stein Mart’s collapse into bankruptcy court. Like many other retailers in this macro climate, Stein Mart was teetering pre-COVID. Sales have been on the decline since 2016. But then in January, Kingswood — along with an entity managed by the Chairman of the company — offered a roughly 20% premium over SMRT’s then-stock price ($0.90/share) to take Stein Mart private. Stein Mart, which had been on distressed watch lists around that time, seemed to be on the receiving end of a much-needed and wildly opportune lifeline. Of course, COVID ended that. Take a look at this mind-boggling decline in YOY performance:

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Ab. So. Lutely. Brutal. Just brutal.

Kingswood agreed. Per the company:

…on April 16, 2020, the Merger Agreement was terminated prior to closing because the COVID19 pandemic forced the Company to close all of its stores and the Company was unable to satisfy the minimum liquidity closing condition in the merger agreement.

Was that the definitive end of the deal? No! The parties continued to discuss new deal parameters but then we, as a country, couldn’t get our sh*t in order. With the country averaging 1000+ deaths a day and tens of thousands of new daily COVID infections, Kingswood got skittish:

The Company has subsequently engaged in discussions with Kingswood regarding sale of the Company as a going-concern in recent months pursuant to a bankruptcy sale; however, a transaction presently appears unlikely given the COVID-19 resurgence.

The resurgence is notable because the company has a significant number of stores in Florida, Texas and California. Consequently,…

The Company’s updated financial projections, following the July resurgence of COVID-19, indicated that the Company would not have sufficient liquidity to continue operating the business in the ordinary course consistent with past practice.

So now the company is liquidating. The company projects $250mm in gross recovery from the liquidation of inventory, equipment, fixtures, leases IP and other assets. As of the petition date, it owes its senior secured lender, Wells Fargo Bank NA ($WFC), $84mm; it also owed its term lender, Gordon Brothers Finance Company, $35mm. Tack on administrative expenses for the professionals administering the case and recoveries for those creditors owed a sum total of $770mm in total liabilities begins to look a bit bleak.

*****

A couple of additional notes:

First, this company appears to have been addicted to factoring. Among the companies top six general unsecured creditors are CIT Commercial Services, Wells Fargo Trade Capital Services, and White Oak Commercial Finance.

Second, you can add SMRT to the list of companies that tapped PPP funds yet couldn’t avoid a bankruptcy filing. It received $10mm from Harvest Small Business Finance LLC.

Third, we’re back to borderline collusion among the liquidation firms. The company’s financial advisor issued RFPs to five liquidation consultants. It received two bids back: one from SB360 Capital Partners LLC and one from a Hilco Merchant Resources-led joint venture that included three — that’s right, three — competitors. Per the company:

The Debtors are of the view that in the current environment, where numerous large retailers are being simultaneously liquidated, joint venture liquidation bids are common because a single liquidation firm may not have the resources to staff and manage the entire project. (emphasis added)

Said another way, the retail industry is such an utter dumpster fire right now that liquidators simply don’t have the bandwidth to manage mandates like these on their own (or so the story goes).

While liquidation sales launch, the company will also seek to sell its leases and IP. Except…

…substantial doubt exists as to whether any buyers will be found for leases given the current depressed condition of the retail real estate market.

And they…

…do not anticipate the sale of intellectual property will produce substantial value.

Right. In case you haven’t noticed, the rubber meets the road with these retailers with the IP. That’s why there was the law suit in the Neiman Marcus matter. That’s why there was the asset stripping transaction in the J.Crew matter. But Stein Mart? IP? Brand? Hahahahaha. The company’s bankers tried selling this turd for over 2.5 years. The only buyer was Kingswood, a small LA-based PE fund with a portfolio of four companies and, well, Stein himself. The IP only had value to him. Go figure. And this is after three — yes, three — separate sale and marketing processes.

Is there a chance a buyer emerges from the shadows? Sure. Miracles happen. If not, Wells and Gordon Brothers will be fine. The professionals will get paid. The unsecured creditors will get hosed. Equity will…well forget about it. At least the equity market is finally getting these right (though reasonable minds could certainly question why the stock is trading as high as it is):

Screen Shot 2020-08-14 at 11.12.13 AM.png

The greater likelihood is that this sucker ends in structured dismissal or a conversion to chapter 7.

It’s crazy. Eight months ago the company was headed for a new chapter. Instead the book shut closed.

August 12, 2020

Jurisdiction: M.D. of FL (Judge Funk)

Capital Structure: see above

Company Professionals:

  • Legal: Foley & Lardner LLP (Gardner Davis, John Wolfel, Neda Sharifi, Richard Guyer, Mark Wolfson, Marcus Helt)

  • Financial Advisor: Clear Thinking Group (Patrick Diercks)

  • Liquidators: Hilco Merchant Resources LLC, Gordon Brothers Retail Partners LLC, Great American Group LLC, Tiger Capital Group LLC, SB360 Capital Partners LLC

  • Claims Agent: Stretto (Click here for free docket access)

Other Parties in Interest:

  • RCF Lender: Wells Fargo Bank NA

    • Legal: Otterbourg PC (Daniel Fiorillo, Chad Simon) & Smith Hulsey & Busey (John Thomas, Stephen Busey)

New Chapter 11 Bankruptcy Filing - Tuesday Morning Corporation ($TUES)

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Tuesday Morning Corporation

May 27, 2020

Dallas-based Tuesday Morning Corporation ($TUES) is 80% open now — just in time to start closing 230 of its brick-and-mortar locations (132 in a first phase and 100 more in a follow-up phase) and commence liquidations sales while in bankruptcy. This, in a nutshell, ladies and gentlemen, sums up the plight of retail today.

If you tune in to CNBC or Bloomberg, one could be forgiven for thinking that a retailer like TUES might actually do relatively well during shelter-in times. It specializes in upscale home furnishings, textiles and housewares for crying out loud. According to the talking heads, everyone is spending time at home judging the inadequacy of their living accommodations — a process that ought to serve as a real boost to home furnishing specialists ((e.g., Restoration Hardware Inc. ($RH)) and home improvement companies ((e.g., Home Depot Inc. ($HD) and Lowe’s Companies Inc. ($LOW)). Not so much for TUES, apparently: the total lack of online presence and the company’s 100% reliance on in-store sales certainly didn’t help matters. The pandemic and related fallout “…resulted in a near-total cessation of new revenue beginning in March 2020.” Repeat: Near. Total. Cessation. Yikes.

Indeed, the debtors’ website serves a very limited purpose: it has a store locator. One literally cannot transact on the site. That said, there does appear to be pent up demand: the company reports that since re-opening its stores on April 24, comp store sales for the reopened stores have been approximately 10% higher than the same period in fiscal ‘19. Perhaps people DID, in fact, identify a lot of things they wanted to remedy at home! And they’re clamoring for that “treasure hunt” experience, y’all!!

What’s somewhat sad about that is, looking at the debtors’ list of top 40 unsecured trade creditors, nearly every vendor they do business with is US-based. In fact, the debtors source 80% of their inventory from US vendors. These store closures and the attendant loss of volume will cascade through the economy. Sigh.

Anyway, we previously wrote about the company in February upon the company’s Q2 ‘20 earnings report. We noted:

Quick coverage of this Dallas-based off-price retailer because, well, it’s performing like dogsh*t. The company reported Q2 ‘20 numbers last week. They. Were. Not. Good.

Nope. Like, not at all. Here are some highlights:

- A 4.1% decrease in net sales YOY driven primarily by a 3% decrease in comp store sales;

- A 3.7% decrease in the size of the average ticket, offset only somewhat by a 0.7% increase in customer transactions (read: more people buying less stuff — not exactly a testament to inventory quality);

- Declining gross margin (down 1.9%);

- Operating income down $5.2mm for the Q and $6.3mm for the 1H of fiscal ‘20;

- Cash is burning, down $6.5mm from June 2019.

The company blamed this piss poor performance on the shortened holiday calendar (how predictable) and uber-competition within that period that resulted in heavy promotions.

We further noted that the company had 175 leases rolling off in the next 12 months and, therefore, “…this is more a lease story than a bankruptcy story.” Whoops. Our crystal ball didn’t pick up on COVID-19. We further noted:

The company has no maturities prior to 2024 and has significant room under its $180mm revolving credit facility ($91.4mm of availability). Still, this thing needs its performance to turn around or it will be dancing with several other distressed retailers soon enough.

“Soon enough” came quicker than we anticipated.

The problem is that not only did the shut-down completely shut the revenue spigot, it also led the debtors to default, as of March 2020, under their revolving credit facility (“RCF”). The RCF Credit Agreement had a provision prohibiting the debtors from “suspend[ing] the operation of its business in the ordinary course of business.” Ever since, they have been in a state of continued negotiation and forbearance with their RCF enders, JPMorgan Chase Bank NA ($JPM), Wells Fargo Bank NA ($WFC), and Bank of America NA ($BAC).

That negotiation has borne fruit. The debtors obtained a DIP financing commitment of $100mm which will consist of some new money as well as a “gradual” roll-up of pre-petition funded debt ($47.9mm + $8.8mm LOCs). The debtors will pay a 2% upfront fee, a 0.5% unused commitment fee and customary letter of credit fees. “The interest rate under the DIP Documents is, either (at the Debtors’ option), (a) a 3 month LIBO Rate (2.0% floor) + 3.00% per annum or (b) CBFR (2.0% floor) + 2.0% per annum, payable on each applicable Interest Payment Date, in cash, provided that no Interest Period may extend beyond the Maturity Date.”

So what now? The debtors main assets are their inventory, a Dallas distribution center and corporate office, and equipment; they also have upwards of $100mm in net operating losses. There isn’t a lot of debt on balance sheet: this is not an example of a private equity firm coming in and dividending all of the value out of the enterprise. Rather, the crux of this case in the near-term will be, as we noted back in February, about the rejection of hundreds of leases and the stream-lining of the debtors’ footprint to a leaner operation. The crux longer-term, however, will be whether there’s any reason for this business to exist. Will the lenders enter into an exit facility? Will there be a plan of reorganization that will allow the debtors to emerge as reorganized debtors? Will there be a sale of substantially all of the assets? The chapter 11 bankruptcy process will be used to hopefully find answers to these questions.

  • Jurisdiction: N.D. of TX (Judge Hale)

  • Capital Structure: $47.9mm funded RCF + $8.8mm LOCs

  • Professionals:

    • Legal: Haynes and Boone LLP (Ian Peck, Stephen Pezanosky, Jarom Yates)

    • Financial Advisor: AlixPartners LLP (Barry Folse, Ray Adams, Wilmer Cerda, JR Bryant)

    • Investment Banker: Stifel Nicolaus & Co. Inc. & Stifel Nicolaus-Miller Buckfire & Co. LLC (James Doak)

    • Real Estate Advisor: A&G Realty Partners LLC

    • Liquidation Consultant: Great American Group LLC

    • Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP Agent: JPMorgan Chase Bank NA

      • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman)

    • Official Committee of Unsecured Creditors

      • Legal: Montgomery McCracken Walker & Rhoads LLP (Edward Schnitzer, Gilbert Saydah Jr., David Banker) & Munsch Hardt Kopf & Harr PC (Kevin Lippman, Deborah Parry)

New Chapter 11 Bankruptcy Filing - J.C. Penney Company Inc. ($JCP)

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J.C. Penney Company Inc.

May 15, 2020

Let’s be clear about something right off the bat. Encino Man, Captain America and Austin Powers could all suddenly surface from being entombed in ice for decades and even THEY wouldn’t be surprised that Texas-based J.C. Penney Company Inc. (and 17 affiliates, the “debtors”) filed for chapter 11 bankruptcy.

There are a couple of ways to look at this one.

First, there’s the debtors’ way. Not one to squander a solid opportunity, the debtors dive under “COVID Cover”:

“Before the pandemic, the Company had a substantial liquidity cushion, was improving its operations, and was proactively engaging with creditors to deleverage its capital structure and extend its debt maturities to build a healthier balance sheet. Unfortunately, that progress was wiped out with the onset of COVID-19. And now, the Company is unable to maintain its upward trajectory through its “Plan for Renewal.” Moreover, following the temporary shutdown of its 846 brick-and-mortar stores, the Company is unable to responsibly pay the upcoming debt service on its over-burdened capital structure.”

The debtors note that since Jill Soltau became CEO on October 2, 2018, the debtors have been off to the races with their “Plan for Renewal” strategy. This strategy was focused on getting back to JCP’s fundamentals. It emphasized (a) offering compelling merchandise, (b) delivering an engaging experience, (c) driving traffic online and to stores (including providing buy online, pickup in store or curbside pickup — the latest in retail technology that literally everyone is doing), (d) fueling growth, and (e) developing a results-minded culture. The debtors are quick to point out that all of this smoky verbiage is leading to “meaningful progress” — something they define as “…having just achieved comparable store sales improvement in six of eight merchandise divisions in the second half of 2019 over the first half, and successfully meeting or exceeding guidance on all key financial objectives for the 2019 fiscal year.” The debtors further highlight:

The five financial objectives were: (a) Comparable stores sales were expected to be down between 7-8% (stores sales were down 7.7%); (b) adjusted comparable store sales, which excludes the impact of the Company’s exit from major appliances and in-store furniture categories were expected to be down in a range of 5-6% (adjusted comparable store sales down 5.6%); (c) cost of goods sold, as a rate of net sales was expected to decrease 150-200 basis points (decreased approximately 210 basis points over prior year, which resulted in improved gross margin); (d) adjusted EBITDA was $583 million (a 2.6% improvement over prior year); and (e) free cash flow for fiscal year 2019 was $145 million, beating the target of positive.

Not exactly the highest bar in certain respects but, sure, progress nonetheless we suppose. The debtors point out, on multiple occasions, that prior to COVID-19, its “…projections showed sufficient liquidity to maintain operations without any restructuring transaction.” Maintain being the operative word. Everyone knows the company is in the midst of a slow death.

To prolong life, the focus has been on and remains on high-margin goods (which explains the company getting out of low-margin furniture and appliances and a renewed focus on private label), reducing inventory, and developing a new look for JCP’s stores which, interestingly, appears to focus on the “experiential” element that everyone has ballyhooed over the last several years which is now, in a COVID world, somewhat tenuous.

Which gets us to the way the market has looked at this. The numbers paint an ugly picture. Total revenues went from $12.87b in fiscal year ‘18 to $12b in ‘19. Gross margin also declined from 36% to 34%. In the LTM as of 2/1/20 (pre-COVID), revenue was looking like $11.1b. Curious. But, yeah, sure COGs decreased as has SG&A. People still aren’t walking through the doors and buying sh*t though. A fact reflected by the stock price which has done nothing aside from slowly slide downward since new management onboarded:

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All of this performance has also obviously called into question the debtors’ ability to grow into its capital structure:

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Here’s a more detailed look at the breakdown of unsecured funded debt:

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And yet, prior to COVID, the debt stack has more or less held up. Here is the chart for JCP’s ‘23 5.875% $500mm senior secured first lien notes from the date of new management’s start to today:

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Here is the chart for JCP’s ‘25 8.624% $400mm second lien notes from the date of new management’s start to today:

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And here is our absolute favorite: JCP’s ‘97 7.625% $500mm senior unsecured notes:

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The fact that these notes were in the 20s mere months ago is mind-boggling.

We talk a lot about how bankruptcy filings are a way to tell a story. And, here, the debtors, while not trying to hide their stretched balance sheet nor the pains of brick-and-mortar department stores with a 846-store footprint, are certainly trying to spin a positive story about management and the new strategic direction — all while highlighting that there are pockets of value here. For instance, of those 846 stores, 387 of them are owned, including 110 operating on ground leases. The private brand portfolio — acquired over decades — represents 46% of total merchandise sales. The debtors also own six of their 11 distribution centers and warehouses.

With that in mind, prior to COVID, management and their advisors were trying to be proactive about the balance sheet — primarily the term loans and first lien secured notes maturing in 2023. In Q3 ‘19, the debtors engaged with their first lien noteholders, term lenders and second lien noteholders on proposals that would, among other things, address those maturities, promote liquidity, and reduce interest expense. According to the debtors, they came close. A distressed investor was poised to purchase more than $750mm of the term loans and, in connection with a new $360mm FILO facility, launch the first step of a broader process that would have kicked maturities out a few years. In exchange, the debtors would lien up unencumbered collateral (real estate). Enter COVID. The deal went up in smoke.

There’s a new “deal” in its stead. A restructuring support agreement filed along with the bankruptcy papers contemplates a new post-reorg operating company (“New JCP”) and a new REIT which will issue new common stock and new interests, respectively. Beyond that, not much is clear from the filing: the term sheet has a ton of blanks in it:

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Screen Shot 2020-05-16 at 12.42.53 PM.png

There’s clearly a lot of work to do here. There’s also the “Market Test” element which entails, among other things, running new financing processes, pursuing potential sale/leaseback transactions, and pursuing a sale of the all or part of the debtors’ assets. If the debtors don’t have a business plan by July 14 and binding commitments for third-party financing by August 15, the debtors are required to immediately cease pursuing a plan and must instead pursue a 363 of all of their assets. Said another way, if the economy continues to decline, consumer spending doesn’t recover, and credit markets tighten up, there’s a very good chance that JCP could liquidate. Remember: retail sales sunk to a record low in April. Is that peak pain? Or will things get worse as the unemployment rate takes root? Will people shop at JC Penney if they even shop at all? There are numerous challenges here.

The debtors will use cash collateral for now and later seek approval of a $900mm DIP credit facility of which $450mm will be new money (L+11.75% continues the trend of expensive retail DIPs). It matures in 180 days, giving the debtors 6 months to get this all done.

*****

A few more notes as there are definitely clear winners and losers here.

Let’s start with the losers:

  1. The Malls. It’s one thing when one department store files for bankruptcy and sheds stores. It’s an entirely different story when several of them go bankrupt at the same time and shed stores. This is going to be a bloodbath. Already, the debtors have a motion on file seeking to reject 20 leases.

  2. Nike Inc. ($NKE) & Adidas ($ADDYY). Perhaps they’re covered by 503(b)(9) status or maybe they can slickster their way into critical vendor status (all for which the debtors seek $15.1mm on an interim basis and $49.6mm on a final basis). Regardless, showing up among the top creditors in both the Stage Stores Inc. bankruptcy and now the J.C. Penney bankruptcy makes for a horrible week.

  3. The Geniuses Who Invested in JCP Debt that Matures in 2097. As CNBC’s Michael Santoli noted, “This JC Penney issue fell only 77 years short of maturing money-good.”

  4. Bill Ackman & Ron Johnson. This.

And here are the winners:

  1. The New York Times. Imperfect as it may be, their digitalization efforts allow us all to read and marvel about the life of James Cash Penney, a name that so befitting of a Quentin Tarantino movie that you can easily imagine JC chillin with Jack Dalton on some crazy Hollywood adventure. We read it with sadness as he boasts of the Golden Rule and profit-sharing. Profits alone would be nice, let alone sharing.

  2. Kirkland & Ellis LLP. Seriously. These guys are smoking it and have just OWNED retail. In the past eight days alone the firm has filed Stage Stores Inc., Neiman Marcus Group LTD LLC and now JCP. It’s a department store hat trick. Zoom out from retail and add in Ultra Petroleum Corp. and Intelsat SA and these folks are lucky they’re working from home. They can’t afford to waste any billable minutes on a commute at this point.

  3. Management. They’re getting what they paid for AND, consequently, they’re getting paid. No doubt Kirkland marched in there months ago and pitched/promised management that they’d secure lucrative pay packages for them if hired and … BOOM! $7.5mm to four members of management!

  • Jurisdiction: S.D. of Texas (Judge Jones)

  • Capital Structure: See above.

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Christopher Marcus, Aparna Yenamandra, Rebecca Blake Chaikin, Allyson Smith Weinhouse, Jake William Gordon) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Kristhy Peguero, Veronica Polnick)

    • OpCo (JC Penney Corporation Inc.) Independent Directors: Alan Carr, Steven Panagos

      • Legal: Katten Muchin Rosenman LLP (Steven Reisman)

    • PropCo (JCP Real Estate Holdings LLC & JC Penney Properties LLC) Independent Directors: William Transier, Heather Summerfield

      • Legal: Quinn Emanuel Urquhart & Sullivan LLP

    • Financial Advisor: AlixPartners LLP (James Mesterharm, Deb Reiger-Paganis)

    • Investment Banker: Lazard Freres & Co. LLC (David Kurtz, Christian Tempke, Michael Weitz)

    • Store Closing Consultant: Gordon Brothers Retail Partners LLC

    • Real Estate Consultants: B. Riley Real Estate LLC & Cushman & Wakefield US Inc.

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP Agent: GLAS USA LLC

      • Legal: Arnold & Porter Kaye Scholer

    • RCF Agent: Wells Fargo Bank NA

      • Legal: Otterbourg PC & Bracewell LLP (William Wood)

      • Financial Advisor: M-III Partners (Mo Meghli)

    • TL Agent: JPMorgan Chase Bank NA

    • Indenture Trustee: Wilmington Trust NA

    • Ad Hoc Group of Certain Term Loan Lenders & First Lien Noteholders & DIP Lenders (H/2 Capital Partners, Ares Capital Management, Silver Point Capital, KKR, Whitebox Advisors, Sculptor Capital Management, Brigade Capital Management, Apollo, Owl Creek Asset Management LP, Sixth Street Partners)

      • Legal: Milbank LLP (Dennis Dunne, Andrew Leblanc, Thomas Kreller, Brian Kinney) & Porter Hedges LLP

      • Financial Advisor: Houlihan Lokey (Saul Burian)

    • Second Lien Noteholders (GoldenTree Asset Management, Carlson, Contrarian Capital Management LLC, Littlejohn & Co.)

      • Legal: Stroock & Stroock & Lavan LLP (Kris Hansen) & Haynes and Boone LLP (Kelli Norfleet, Charles Beckham)

      • Financial Advisor: Evercore Group LLC (Roopesh Shah)

    • Large equityholder: BlackRock Inc. (13.85%)

New Chapter 11 Bankruptcy & CCAA Filing - Pier 1 Imports Inc. ($PIR)

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Pier 1 Imports Inc.

February 17, 2020

Fort Worth, Texas-based Pier 1 Imports Inc. and seven affiliates (the “debtors”) have fulfilled their obvious destiny and finally fallen into bankruptcy court in the Eastern District of Virginia. Contemporaneously, the debtors filed a CCAA proceeding in Canada to effectuate the closure of all Canadian operations. Color us pessimistic but we’re not feeling so great about the debtors’ go-forward chances in the US either.

We’ve covered the debtors ad nauseum in previous editions of PETITION. Here — supported by an ode to “Anchorman” — we described the debtors’ recent HORRIFIC financial performance and noted how a bankruptcy would be sure to confuse a peanut gallery accustomed to spouting regular (and sometimes inaccurate) hot takes about how private equity is killing retail.* We wrote:

The reaction to this surely-imminent bankruptcy (and, if we had a casino near us, liquidation) is going to be interesting. It is sure to flummox the “Private Equity is Killing Retail” camp because, well, it’s not PE-backed. Similarly it’ll confuse the “You Shouldn’t Put So Much Debt on Retail” cohort because, well, there really isn’t that much debt on the company’s balance sheet. Chuckling in the corner will be “The US is Over-Stored” team … And “The Millennials Aren’t Buying Homes and Furnishing Them With Chinese-Made Tchotchkes” gang (thanks a ton, Marie Kondo) … And the “Management Has Blown Chunks, The Assortment Sucks” bunch … And, finally, “The Amazon Effect” squad….

Over the weekend, The New York Times ran a piece from Austan Goolsbee, an economics professor at the University of Chicago’s Booth School of Business, that — no disrespect to the professor — says many of the same things PETITION has been saying for a LONG LONG time. That is, “The Amazon Effect” is overstated. He argues that “three major economic forces have had an even bigger impact on brick-and-mortar retail than the internet has”: (1) big box stores, (2) income inequality, and (3) the preference shift away from goods towards services. It’s fair to say that these three forces affected the debtors in a big big way.**

Surely, e-commerce has a lot to do with it too. As one PETITION advisor said about the debtors’ wares yesterday:

“You can just order that sh*t online. You don’t need to try it on.”

It’s a fair point.

Another fair point that Mr. Goolsbee omits from his analysis is the role of management. It’s safe to say that the US is suffering from an epidemic of retail ineptitude.

And like the coronavirus, it keeps spreading from one retailer to the next.***

But we digress.

The business has clearly suffered:

From fiscal years 2014 to 2018, the company’s net income dropped from $108 million to about $11.6 million and in fiscal year 2019 Pier 1 experienced a $198.8 million loss.

So, what’s the upshot here? The debtors announced a plan support agreement and intend to use the chapter 11 bankruptcy process to (a) continue to shutter the previously announced ~450 stores (read: get ready for a lot of lease rejections) and (b) pursue a sale pursuant to a chapter 11 plan of reorganization of what remains of the debtors’ business. Frankly, this was masterful messaging: the announcement relating to a plan support agreement and potential plan of…wait for it…”reorganization”(!) head-faked the entire market into thinking this thing might actually be salvageable. That’s where the fine print comes in.

The debtors have dubbed this an “all weather” chapter 11 plan because it provides for either a sale or the equitization of the term loan at the term lenders’ election. This begs the question: will Pathlight Capital LP want to own this thing?🤔 This bit was eye-catching:

“To be clear, the term loan lenders have made no decision at this point, but instead support the process as outlined in the plan support agreement.”

Yeah, we bet they do. Qualified bids will be due on or before March 23 and the lenders have until March 27 to make their election. Which way will the winds blow?

Note that “the process” isn’t currently supported by a stalking horse purchaser. 🤔

Note further that the debtors are required under the DIP to distribute informational packages and solicitations for sale of the debtors’ assets on a liquidation basis to liquidators by March 9.🤔 🤔

It looks like we’ll know the answer very soon.

To finance the cases, the debtors obtained a committed for a $256mm DIP credit facility. The facility includes a $200mm revolving loan commitment and a $15mm first in last out term loan, each provided 50/50 by Bank of America N.A. and Wells Fargo National Association, and a $41.2mm term loan from Pathlight. This was the pre-petition capital structure:

Screen Shot 2020-02-18 at 11.39.07 AM.png

The DIP effectively just rolls up much of the pre-petition debt. There is no new money. The messaging here, then, is also critical: the DIP facility ought to provide customers, vendors and employees comfort that there is access to liquidity if needed. Cash collateral usage, however, is the main driver here: the debtors believe that operating cash flow will suffice to handle working capital needs and bankruptcy expenses.

To summarize, we have another distressed retailer that is scratching and clawing to live. They’ve taken all of the usual steps to extend runway: cost cuts, footprint minimalization, new management. Bankruptcy is a last-ditch effort to survive: the debtors take pains to try and convince some prospective buyer that there is life left in the debtors’ brick-and-mortar business:

The remaining go-forward stores achieved superior sales and customer metrics in the last twelve months compared to the closing stores, including approximately 15% greater sales per square foot on average.

And if that doesn’t do it, there’s the argument that there’s an e-commerce play here. The debtors similarly go to great lengths to state OVER AND OVER AGAIN that e-commerce represents 27% of total sales. They’re practically screaming, “Look at me, look at me! We can be interesting to you [Insert Authentic Brands Group here]!”

Pathlight is sure as hell hoping someone bites.

*Kirkland & Ellis…uh…we mean, the “debtors” appear to agree, stating, in reference to private equity, that “[t]oo many pundits have sought to point in too many wrong directions,” citing pieces in RetailDive and The Wall Street Journal. THAT ladies and gentlemen, is client advocacy!

**It’s also fair to say that Professor Goolsbee does his readers a disservice by neglecting the overall picture which, no doubt, also includes over-expansion, too much retail per capita, private equity and over-levered balance sheets. These cowboys are closing 400+ stores for a reason.

Of course, long time PETITION readers know that we’ve been arguing for a LOOOOONG time that the “perfect storm” hitting retail is a confluence of factors that cannot just be lazily summarized as “private equity” or “The Amazon Effect.” It’s good to see that the folks at Kirkland & Ellis agree:

In the face of the longest bull run in U.S. history (close to 3,000 days and counting), a myriad of factors have collectively changed the ways in which consumers and retailers interact—creating for retailers what is tantamount to a perfect storm—and directly contributing to the struggles retailers face in a shifting marketplace.5

Then it’s as if they lifted this footnote straight out of previous PETITION briefings:

Screen Shot 2020-02-18 at 1.39.17 PM.png

***Not to cast aspersions, but the resume of the current PIR CEO is…uh…interesting: prior experience includes FullBeauty Brands, HHGregg, and Marsh Supermarkets. Any of those names sound familiar to bankruptcy professionals?

  • Jurisdiction: E.D. of Virginia (Judge Huennekens)

  • Capital Structure: $140mm RCF + $47.3mm LOC, $189mm Term Loan (Wilmington Savings Fund Society FSB), $9.9mm industrial revenue bonds

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Emily Geier, AnnElyse Scarlett Gains, Joshua Altman) & Kutak Rock LLP (Michael Condyles, Peter Barrett, Jeremy Williams, Brian Richardson)

    • Canadian Legal: Osler Hoskin & Harcourt LLP

    • Independent Directors: Steven Panagos & Pamela Corrie

    • Financial Advisor: AlixPartners LLP (Holly Etlin)

    • Investment Banker: Guggenheim Securities LLC (Durc Savini)

    • Real Estate Advisor: A&G Realty Partners LLC

    • Liquidation Consultant: Gordon Brothers Retail Partners LLC

      • Legal: Riemer & Braunstein LLP (Steven Fox, Anthony Stumbo)

    • Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP ABL Agent: Bank of America NA

      • Legal: Morgan, Lewis & Bockius LLP, Hunton Andrews Kurth LLP, and Norton Rose Fulbright Canada LLP

    • DIP ABL Term Agent: Pathlight Capital LP

      • Legal: Choate Hall & Stewart LLP (John Ventola, Jonathan Marshall) and Troutman Sanders LLP (Andrew Buxbaum)

    • Ad Hoc Term Lender Group: Eaton Vance Management, Insight North America LLC, Marathon Asset Management LP, MJX Asset Management LLC, Whitebox Advisors LLC, ZAIS Group LLP

      • Legal: Brown Rudnick LLP (Robert Startk, Uchechi Egeonuigwe, Steven Pohl, Sharon Dwoskin) & Whiteford Taylor & Preston LLP (Christopher Jones, Vernon Inge, Corey Booker)

      • Financial Advisor: FTI Consulting Inc.

    • Large Equityholders: Charles Schwab Investment Management, Dimensional Fund Advisors LLP

    • Official Committee of Unsecured Creditors: Bhati & Company, Synergy Home Furnishings LLC, United Parcel Services Inc., Brixmor Operating Partnership LP, Brookfield Property REIT Inc.

      • Legal: Foley & Lardner LLP (Erika Morabito, Brittany Nelson, Timothy Mohan) & Cole Schotz PC (Seth Van Aalten)

      • Financial Advisor: Province Inc. (Paul Huygens, Sanjuro Kietlinski, Walter Bowser, Paul Navid, Shane Payne, Courtney Clement)

🙈New Chapter 11 Bankruptcy - Fred's Inc.🙈

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Fred’s Inc.

September 9, 2019

Dallas-based Fred’s Inc. and seven affiliated debtors have filed a long-awaited bankruptcy in the District of Delaware with the intent to unwind the business. The debtors are — or, we should say, were — discount retailers with full service pharmacies, focusing on fixed income families in small and medium-sized towns.

The bankruptcy papers — from a law firm largely known for litigation (a curious fact here until you consider that Alden Global Capital LLC is a large shareholder) — are remarkably sparse. No lengthy back story about the company and how “iconic” it is. Just, “it was founded in 1947, sold a lot of sh*t to people who have no other alternative and now we’re kaput.” No discussion of the interim, say, 70+ years. Not a mention in the First Day Declaration of the failed Walgreens/Rite-Aid transaction that would have given Fred’s a larger pharmacy footprint. Nothing about Alden’s stewardship. Nada. Not a word, outside of the motion to assume the liquidation consultant agreement, about the state of retail (and in that motion, only: “The Debtors faced significant headwinds given the continued decline of the brick-and-mortar retail industry.”). Given the case trajectory — an orderly liquidation — we suppose there’s really no need to spruce things up. There’s nothing really left to sell here.* All in, it’s, dare we say, actually kind of refreshing: finally we have a debtor dispensing with the hyperbole.

The debtors started 2018 with 557 locations. After four rounds of robust closures — 263 between April and June and another 178 between July and August — the debtors have approximately 125 locations remaining. Considering that those stores are now closing too and given that the average square footage per store was 14,684, the end result will be ~8mm of square footage unleashed on the commercial real estate market. We suspect that these small and medium-sized towns will have some empty storefronts for quite some time.

The debtors have a commitment from their pre-petition lenders for a $35mm DIP credit facility (which includes a rollup of pre-petition debt).

*The Debtors previously sold 179 of their pharmacy stores to a Walgreens Boots Alliance Inc. ($WBA) subsidiary for $177 million in fiscal Q4 ‘18 and 38 more to a CVS Health Corp. ($CVS) subsidiary for ~$15 million in August.

  • Jurisdiction: D. of Delaware (Judge Sontchi)

  • Capital Structure: $15.1mm RCF (+ $8.8mm LOCs), $20.9mm (Cardinal Health Inc., secured by pharmacy assets), $1.4mm in other secured debt.

  • Professionals:

    • Legal: Kasowitz Benson Torres LLP (Adam Shiff, Robert Novick, Matthew Stein, Shai Schmidt) & Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Matthew Harvey, Joseph Barsalona)

    • Board of Directors: Heath B. Freeman, Timothy A. Barton, Dana Goldsmith Needleman, Steven B. Rossi, and Thomas E. Zacharias

    • Special Legal: Akin Gump Strauss Hauer & Feld LLP

    • Financial Advisor: Berkeley Research Group LLC (Mark Renzi)

    • Investment Banker: PJ Solomon

    • Liquidator: SB360 Capital Partners LLC

    • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP Lender ($35mm): Regions Bank

      • Legal: Parker Hudson Rainer & Dobbs LLP (Eric Anderson, Bryan Bates) & Richards Layton & Finger PA (John Knight)

    • DIP Lender: Bank of America

      • Legal: Choate Hall & Stewart (John Ventola)

    • Large Shareholder: Alden Global Capital LLC

Update: 9/9/19 #19

🙈New Chapter 11 Bankruptcy Filing - Avenue Stores LLC🙈

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Avenue Stores LLC

August 16, 2019

Retail, retail, retail.

Brutal. Absolutely B.R.U.T.A.L.

Avenue Stores LLC, a speciality women’s plus-size retailer with approximately 2,000 employees across its NJ-based HQ* and 255 leased stores,** is the latest retailer to find its way into bankruptcy court. On Friday, August 16, Avenue Stores LLC filed for chapter 11 bankruptcy in the District of Delaware. Like Dressbarn, another plus-size apparel retailer that’s in the midst of going the way of the dodo, any future iteration of the Avenue “brand” will likely exist only on the interwebs: the company intends to shutter its brick-and-mortar footprint.

What is Avenue? In addition to a select assortment of national brands, Avenue is a seller of (i) mostly “Avenue” private label apparel, (ii) intimates/swimwear and other wares under the “Loralette” brand and (iii) wide-width shoes under the “Cloudwalkers” brand. The company conducts e-commerce via “Avenue.com” and “Loralette.com.” All of this “IP” is the crux of the bankruptcy. More on this below. 

But, first, a digression: when we featured Versa Capital Management LP’s Gregory Segall in a Notice of Appearance segment back in April, we paid short shrift to the challenges of retail. We hadn’t had an investor make an NOA before and so we focused more broadly on the middle market and investing rather than Versa’s foray into retail and its ownership of Avenue Stores LLC. Nevertheless, with the benefit of 20/20 hindsight, we can now see some foreshadowing baked into Mr. Siegel’s answers — in particular, his focus on Avenue’s e-commerce business and the strategic downsizing of the brick-and-mortar footprint. Like many failed retail enterprises before it, the future — both near and long-term — of Avenue Stores is marked by these categorical distinctions. Store sales are approximately 64% of sales with e-commerce at approximately 36% (notably, he cited 33% at the time of the NOA). 

A brand founded in 1987, Avenue has had an up-and-down history. It was spun off out of Limited Brands Inc. and renamed in 1989; it IPO’d in 1992; it was then taken private in 2007. Shortly thereafter, it struggled and filed for bankruptcy in early 2012 and sold as a going-concern to an acquisition entity, Avenue Stores LLC (under a prior name), for “about $32 million.” The sale closed after all of two months in bankruptcy. The holding company that owns 100% of the membership interests in Avenue Stores LLC, the operating company, is 99%-owned by Versa Capital Management. 

Performance for the business has been bad, though the net loss isn’t off the charts like we’ve seen with other recent debtors in chapter 11 cases (or IPO candidates filing S-1s, for that matter). Indeed, the company had negative EBITDA of $886k for the first five months of 2019 on $75.3mm in sales. Nevertheless, the loss was enough for purposes of the debtors’ capital structure. The debtors are party to an asset-backed loan (“ABL”) memorialized by a credit agreement with PNC Bank NA, a lender that, lately, hasn’t been known for suffering fools. The loan is for $45mm with a $6mm first-in-last-out tranche and has a first lien on most of the debtors’ collateral. 

The thing about ABLs is that availability thereunder is subject to what’s called a “borrowing base.” A borrowing base determines how much availability there is out of the overall credit facility. Said another way, the debtors may not always have access to the full facility and therefore can’t just borrow $45mm willy-nilly; they have to comply with certain periodic tests. For instance, the value of the debtors’ inventory and receivables, among other things, must be at a certain level for availability to remain. If the value doesn’t hold up, the banks can close the spigot. If you’re a business with poor sales, slim margins, diminishing asset quality (i.e., apparel inventory), and high cash burn, you’re generally not in very good shape when it comes to these tests. With specs like those, your liquidity is probably already tight. A tightened borrowing base will merely exacerbate the problem.

Lo and behold, PNC declared the debtors in default on July 22; in turn, they imposed default interest on the debtors and initiated daily cash sweeps of the debtors’ bank accounts. Like we said. Suffer. No. Fools.*** The debtors owe $15.2mm on the facility. 

The debtors also have outstanding a subordinated secured note to the tune of $37.8mm. The note pays interest at 15% but is paid in kind.**** The lender on the note is an affiliate of Versa, and per the terms of the note, Versa had continued, at least through April 2019, to fund the business (and letters of credit for the debtors’ benefit) with millions of dollars of capital. 

If this sounds like a hot mess, well, yeah, sure, kudos. You’re clearly paying attention. It’s a dog eat dog world out there. Per the company:

The Debtors operate in an extremely competitive retail environment, facing competition from other specialty-retail stores, including Lane Bryant, Ashley Stewart, and Torrid, and mass-market retailers such as Walmart and Target, many of which are located in close proximity to Avenue stores. In addition to long-standing, traditional competitors within the plussize segment, there has been a recent influx of many other iconic fashion retail brands expanding their range of size offerings into the plus-size range, as well as a proliferation of new entrants targeting this same plus-size fashion market. Due to increased competition, the Debtors have faced significant pressure to maintain market share, which has directly and negatively affected their profitability.

Not that this is anything new. We all know this by now: competition is fierce (Stitch Fix Inc. ($SFIX), Neiman Marcus, Kohl’s Corporation ($KSS), Macy’s Inc. ($M) and others are now going after it hard), B&M sucks because leases carry higher expenses, store traffic is down, blah blah f*cking blah. The company continues:

…changes in consumer spending habits have necessitated many retailers to increase promotional activities and discounting, leading to thinner profit margins. Onerous brick-and-mortar lease terms and increased operating costs, during a period of downturn in the retail sector and deep discounting, have intensified retail losses.

Interestingly, in the face of surging U.S. retail sales in July,***** the company also notes that “a review of historic customer data indicates that Avenue customers are shopping less frequently than they once were….” They blame this on a “[s]hifts in consumer preferences” and the debtors’ emphasis on “fashion basics.” DING DING DING. No wonder customers are shopping there less frequently. “Basic” is the antithesis of Instagram-based retail these days. Basics can be purchased at any big box retailer; basics are now available via Amazon’s private label. Basics don’t create an influencer and, on the flip side, no influencer will market “basic.” Maybe Avenue could get away with “fashion basics” if it had brand-equity like SUPREME and was perceived as a luxury brand. But far from it. 

Speaking of basic, that pretty much describes the go-forward game plan. We’ll lay it out for you:

  • Engage an independent director to explore strategic alternatives;

  • Engage professionals (Young Conaway is legal and Berkeley Research Group as restructuring advisor and CRO)******;

  • Consider whether there’s going concern value, conclude, like, basically, “nope,” and then hire a consultant******* to solicit bids from liquidators for the B&M piece and an investment banker (Configure Partners) for the IP and e-commerce business; 

  • Issue WARN notices, RIF employees, and start shuttering stores (with intent to file a rejection motion on day 1 of the bankruptcy); 

  • Select a stalking horse bidder for the B&M assets from the pool of interested liquidators (in this case, Gordon Brothers and Hilco Merchant Resources LLC); 

  • Continue to search for a stalking horse bidder for the IP and e-commerce (at filing, there wasn’t one yet); and

  • Secure DIP financing (here, $12mm from PNC) to fund the cases while the B&M liquidation transpires and the banker searches under every rock under an extremely compressed timeframe (by 9/24/19) for that e-commerce/IP buyer.******** 

So we’ll know in the next 60 days what the future is for Avenue.

If there is one.

*Let’s pour one out for NJ. The state’s larger retailers are having a rough go of things lately, see, e.g., Toys R Us. The 2,000 figure is updated to reflect a recent round of layoffs. 

**The debtors are located primarily in shopping malls and shopping centers, doing business in 35 states. They have a distribution center for brick-and-mortar merchandise in Troy, Ohio, and a third-party warehousing facility located in Dallas, Texas, which handles logistics for e-commerce. The Troy center is the subject of a wholly unoriginal PE-backed sale/leaseback transaction. The debtors sold the center for $11.3mm and subsequently entered into a 15-year lease with the buyer, RD Dayton LLC. We mention this because sale/leaseback transactions have been getting hyper-focus these days as a tactic-of-choice by private equity overlords to extract returns out of portfolio companies’ assets with any actual value: real property. If you’re wondering why there is very little asset value left for unsecured creditors in retail cases, sale/leaseback transactions are often a culprit. Here, it’s especially egregious because Avenue doesn’t own ANY of its stores: the entire footprint is leased.

The debtors recently closed the Ohio center and transitioned its inventory to Texas and the company already filed a motion seeking to reject this lease (Docket 15).

***This is not extraordinary. Banks do this all of the time when debtors default. A liquidity starved company is almost always toast (read: bankrupt) once this happens. 

****PIK interest means that the interest accrues in the form of additional notes and is not subject to scheduled cash payments. 

*****Per Reuters:

Retail sales increased 0.7% last month after gaining 0.3% in June, the government said. Economists polled by Reuters had forecast retail sales would rise 0.3% in July. Compared to July last year, retail sales increased 3.4%.

******Something tells us that the likes of FTI, A&M and AlixPartners are happy to cede the liquidating retailer market to Berkeley Research Group. 

*******This is one of the more ingenious things to come out of the restructuring market in recent years. These liquidator agreements are so unintelligible that they might as well be written in Dothraki. Hence the need for an intermediary to break out the secret decoder ring and figure out what is actually being contracted for. We don’t know: if something is so woefully incoherent that it requires a separate consultant just to interpret it, something tells us that obfuscation is a feature not a bug.

********If none is found, the liquidator will also get these assets as part of the agency agreement. 

  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure:

  • Professionals:

    • Legal: Young Conaway Stargatt & Taylor LLP (Robert Brady, Andrew Magaziner, Ashley Jacobs, Allison Mielke, Betsy Feldman)

    • Financial Advisor/CRO: Berkeley Research Group (Robert Duffy)

    • Investment Banker: Configure Partners

    • Liquidators: Gordon Brothers and Hilco Merchant Resources LLC

    • Liquidation Consultant: Malfitano Advisors LLC

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Pre-petition & DIP Agent: PNC Bank NA

      • Legal: Blank Rome LLP (Regina Stango Kelbon)

    • Subordinated Lender: Versa Capital Management LP

      • Legal: Landis Rath & Cobb LLP (Adam Landis, Matthew McGuire)

🤓New Chapter 11 Bankruptcy Filing - Loot Crate Inc.🤓

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Loot Crate Inc.

August 11, 2019

We’re old enough to remember when subscription boxes were all the rage. The e-commerce trend became so explosive that the Washington Post estimated in 2014 that there were anywhere between 400 and 600 different subscription box services out there. We reckon that — given the the arguably-successful-because-it-got-to-an-IPO-but-then-atrocious-public-foray by Blue Apron Inc. ($APRN) — the number today is on the lower end of the range (if not even lower) as many businesses failed to prove out the business model and manage shipping expense.

And so it was only a matter of time before one of them declared bankruptcy.

Earlier this morning, Loot Crate Inc., a Los Angeles-based subscription service which provides monthly boxes of geek- and gaming-related merchandise (“Comic-con in a box,” including toys, clothing, books and comics tied to big pop culture and geek franchises) filed for bankruptcy in the District of Delaware.* According to a press release, the company intends to use the chapter 11 process to effectuate a 363 sale of substantially all of its assets to a newly-formed buyer, Loot Crate Acquisition LLC. The company secured a $10mm DIP credit facility to fund the cases from Money Chest LLC, an investor in the business. The company started in 2012.

Speaking of investors in the business, this one got a $18.5mm round of venture financing from the likes of Upfront Ventures, Sterling.VC (the venture arm of Sterling Equities, the owner of the New York Mets), and Downey Ventures, the venture arm of none other than Iron Man himself, Robert Downey Jr. At one point, this investment appeared to be a smashing success: the company reportedly had over 600k subscribers and more than $100mm in annualized revenue. It delivered to 35 countries. Inc Magazine ranked it #1 on its “Fastest Growing Private Companies” list. Deloitte had it listed first in its 2016 Technology Fast 500 Winners list. Loot Crate must have had one kicka$$ PR person!

But life comes at you fast.

By 2018, the wheels were already coming off. Mark Suster, a well-known and prolific VC from Upfront Ventures, stepped off the board along with two other directors. The company hired Dendera Advisory LLC, a boutique merchant bank, for a capital raise.** As we pointed out in early ‘18, apparently nobody was willing to put a new equity check into this thing, despite all of the accolades. Of course, allegations of sexual harassment don’t exactly help. Ultimately, the company had no choice but to go the debt route: in August 2018, it secured $23mm in new financing from Atalaya Capital Management LP. Per the company announcement:

This financing, led by Atalaya Capital Management LP ("Atalaya") and supported by several new investors (including longstanding commercial partners, NECA and Bioworld Merchandising), will enable Loot Crate to bolster its existing subscription lines and improve the overall customer experience, while also enabling new product launches, growth in new product lines and the establishment of new distribution channels.

Shortly thereafter, it began selling its boxes on Amazon Inc. ($AMZN). When a DTC e-commerce business suddenly starts relying on Amazon for distribution and relinquishes control of the customer relationship, one has to start to wonder. 🤔

And, so, now it is basically being sold for parts. Per the company announcement:

"During the sale process we will have the financial resources to purchase the goods and services necessary to fulfill our Looters' needs and continue the high-quality service and support they have come to expect from the Loot Crate team," Mr. Davis said.

That’s a pretty curious statement considering the Better Business Bureau opened an investigation into the company back in late 2018. Per the BBB website:

According to BBB files, consumers allege not receiving the purchases they paid for. Furthermore consumers allege not being able to get a response with the details of their orders or refunds. On September 4, 2018 the BBB contacted the company in regards to our concerns about the amount and pattern of complaints we have received. On October 30, 2018 the company responded stating "Loot Crate implemented a Shipping Status page to resolve any issues with delays here: http://loot.cr/shippingstatus[.]

In fact, go on Twitter and you’ll see a lot of recent complaints:

High quality service, huh? Riiiiiiight. These angry customers are likely to learn the definition of “unsecured creditor.”

Good luck getting those refunds, folks. The purchase price obviously won’t clear the $23mm in debt which means that general unsecured creditors (i.e., customers, among other groups) and equity investors will be wiped out.***

Sadly, this is another tale about a once-high-flying startup that apparently got too close to the sun. And, unfortunately, a number of people will lose their jobs as a result.

Market froth has helped a number of these companies survive. When things do eventually turn, we will, unfortunately, see a lot more companies that once featured prominently in rankings and magazine covers fall by the wayside.

*We previously wrote about Loot Crate here, back in February 2018.

**Dendera, while not a well-known firm in restructuring circles, has been making its presence known in recent chapter 11 filings; it apparently had a role in Eastern Mountain Sports and Energy XXI.

***The full details of the bankruptcy filing aren’t out yet but this seems like a pretty obvious result.

⚡️UPDATE: August 18, 2019⚡️

On August 12, we published — and you should revisit — 📦Nerds Lament: Subscription Box Company Goes BK📦, a report on the bankruptcy filing of a company called Loot Crate Inc., an e-commerce subscription service that ships all kinds of nerdy sh*t to dorks who like comics and stuff (PETITION Note: for the record, we’re not making fun of nerds…we’re nerds…we’re just not nerds who subscribe to nerdy e-commerce subscription boxes and collect nerdy lunch boxes, nerdy bobbleheads, nerdy trinkets and super-nerdy action figures…there are levels here, people). While this company is generally a pimple on the U.S. economy’s very large a$$, we think it’s important for our readers — bankruptcy pros, investors, operators, startup/tech enthusiasts — to understand some of the reasons behind its demise: the small to middle market, after all, tends to get short shrift in a sea of bankrupted retailers with a formidable brick-and-mortar footprint or bankrupted oil and gas companies that have shredded public equity and debt value to the chagrin of many an investor. And as if that isn’t justification enough, how can we NOTrevisit this company when there’s THIS summary in its bankruptcy papers:

In short, despite liquidity constraints unlike those I and the Debtors’ other professionals have ever seen, the Debtors have created a path to get through Chapter 11, albeit quickly, to maintain their going concern, reduce the backlog of shipments (and Vantiv’s potential exposure), allow for renewed dealings with valued vendors and licensors, and achieve a result that is the best we could foresee over the last few distressing weeks and months. (emphasis most definitely added).

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HAVE. EVER. SEEN. HAHAHAHAHA. Restructuring professionals see a LOT. This is really saying something.

Anyway, to set the mood, let’s start with this choice quote from the company’s filing:

This is a company that has succeeded from ground zero – it is not an “old economy” business, shrinking every year, trying to determine how to remain relevant. Instead, it is the view of the Debtors’ management that once better capitalized and freed from legacy liabilities through the proposed sale of assets in these cases, the Debtors will return to success.

Some might take exception to the use of the word “succeed” here given the company’s current predicament. Just saying. Some might also be forgiven for viewing the conclusions of “Debtors’ management” with a glint of skepticism. Why? Keep reading: we’re about to explain the myriad reasons why this company failed.

First, and this is something that PETITION has focused on considerably over the last several months as digital advertising supply reportedly decreases, prices increase, and more and more DTC brands are seeking targeted eyeballs to sell product. Choice bit here:

By late 2017, the Debtors were having financial issues. The subscription and entertainment market has a healthy and sometimes insatiable appetite for marketing dollars. While the Debtors were very popular with their fan base, the need to continue to spend on marketing was hampering the Debtors’ finances. (emphasis added).

We cannot over-emphasize how critical this is. As more and more B&M retailers underscore their need to leverage social media, influencers, etc., they’ll find it’s not so easy in today’s hyper-competitive DTC environment to generate revenue while avoiding astronomical customer acquisition costs. The upcoming presidential election, meanwhile, might put increased pressure on retailer budgets as Facebook Inc. ($FB), Google Inc. ($GOOGL), and others attempt to limit the number of ads in users’ feeds in the name of “user experience.” Meanwhile, we’ll continue to see both of these behemoths on lists of top 30 creditors: Facebook, for instance, is listed here. Google is one of Avenue Stores LLC’s largest creditors.

All of which is to say that it appears that Loot Crate’s CACs were through the effing roof.

Second, PROGRESSIVES!!! And MAGA!!! The company initially had a distribution system based out of California, “a very high wage stage.” Now the company fulfills “most of their shipments with a third party warehouse and shipper, operating out of Tijuana, Mexico.” We wonder if the facility is wired up with Maxcom tech!?!?

Third, the company blames the Supreme Court’s Wayfair decision (which, for the record, we had highlighted long before the mainstream media) for some of its liquidity problems; it alleges that the decision “require[d] them to accrue sales tax charges for goods sold in the past.” More on taxes below: as a preview, there was seemingly some shady-a$$ sh*t going on here.

Fourth, this company got to experience first hand the dangers of venture debt. Because of the issues noted above, the company ran afoul of its $15mm credit facility with Breakwater Credit Opportunities Fund, an LA-based private investment firm that specializes in direct debt and equity investments in lower middle market companies. The company defaulted on the loan in 2017. This, naturally, gave Breakwater leverage to extract economic concessions from the company and juice their governance rights.

Needing to refinance out Breakwater to avoid Breakwater taking over the board (and presumably tossing the founding management team out the window), the company refinanced the Breakwater loan with a $21mm term loan from Midtown Madison Management LLC, an affiliate of Atalaya Capital Management (MMM also received a now-worthless warrant for 17% of the company’s common stock). Breakwater got out whole, with accrued and unpaid interest, default interest, fees, and repayment of OID provided at the time of default. Savage play by Breakwater. As a condition to the refinancing, the company issued $4.4mm in convertible subordinated notes and warrants to a number of holders, including the proposed DIP lender, the founder’s daddy, and Dendera Advisory LLC (which took notes and warrants in lieu of payment for services rendered in connection with the refinancing). Apparently, only Money Chest LLC, the proposed DIP lender, perfected liens.

The refinancing, while beneficial to Breakwater, did not prove the salvation for the company that it had hoped for. Per the company:

While the August 2018 Financing provided the Debtors with a slight liquidity reprieve, the fees and expenses that had to be repaid to Breakwater made this amount far less than expected, resulting in continued difficulty with vendors after the transaction, resulting in turn in difficulty in filling crates due to missing custom items, causing subscriber chargebacks and cancellations, and then resulting in serious concerns by the Debtors’ credit card processor, and its withholding of funds from the Debtors. All of this caused greater liquidity issues with each passing week and month. In short, the cycle in this unfortunate paragraph never stopped, with each negative event causing other negative events, again and again, and liquidity problems continued into 2019 and until these filing of these Cases. (emphasis added).

Man, these guys give good Declaration. For any business, not just a startup, that paragraph is utterly painful to read.

Let’s break this down: management (1) took an unfavorable deal to refi-out their venture lender and protect their a$$es, (2) quickly realized that, after all was said and done, the company still had severely constrained liquidity, (3) stretched vendors, (4) irritated vendors, resulting in inventory issues, (5) couldn’t ship their product, (6) pissed off customers, (7) sparked credit card chargebacks presumably en masse, and (8) red-flagged their credit card processor to the point that it, too, wanted to run for the hills (more on this below).

Yeah, sure, these guys are totally dependable.

programming.jpeg

Fifth, the company is prisoner to two large creditors. One, Clear Finance Technology Corporation d/b/a Clearbanc, paid the company’s vendors for the company in exchange for a royalty on billings. Clearly this was meant to provide vendors with comfort given the company’s liquidity shortfall. There will be some litigation to determine whether this arrangement is a financing vs. an ownership agreement and, in turn, whether Clearbanc is, by virtue of Clearbanc’s alleged failure to file a UCC-1 perfecting its interest, an unsecured creditor. The other, Vantiv LLC, is the company’s credit card processor and the company’s patsy for why shipments haven’t timely shipped and customers are pissed off. Per the company:

Vantiv has a contingent claim to the extent the Debtors do not ship goods to their customers for which such customers have already paid via credit card. Such customers could then, depending on their credit card agreements and applicable law, reverse or dispute prior charges, which may then have to be returned to the customers’ credit card issuer (and in turn, the customer) by Vantiv. Due to serious liquidity issues over the past months – including Vantiv’s withholding substantial sums to protect itself against this risk – the Debtors’ have over $20 million in customer orders for which the Debtors have obtained payment, but for which the Debtors have not shipped goods….

Vantiv is holding approximately $1.7 million of collections it made for the Debtors and, as of the Petition Date, continues to reserve 100% of the Debtors’ customer billings thereby guaranteeing a continuation of the vicious cycle that has strangled liquidity.

Right. Credit card processors aren’t typically in the business of losing money and they, generally, understand risk. This is what happens when a business starts to spiral: counter-parties who are more than happy to service your account when you’re, say, a high-flying startup ranked at the top of growth lists and featured in Techcrunch, abandon you like you’ve just fallen into a putrid pile of horse manure. Indeed, Vantiv’s threats to terminate credit card processing precipitated the chapter 11 filing: the company simply couldn’t function as an online business without credit card payment processing.

Sixth, we may be reading into things too much but it sure seems like the company engaged in some accounting shenanigans to help with liquidity — switching revenue recognition methodologies while in the midst of its liquidity issues. It helped…maybe…until it didn’t and when it didn’t, the company got pounded in a big big way with a big big outstanding tax liability. In many respects, the bankruptcy filing saves the debtors in this regard: through a customary tax motion and with DIP proceeds, the debtors seek to pay the approximately $5.87mm in back taxes owed. Death and taxes, baby. Death and taxes. Or, more appropriate here, bankruptcy and taxes. But we digress.

Finally, this bit should be a cautionary tale for startups in the e-commerce subscription business:

Unfortunately, the complexity of the transaction, the uncertainty surrounding eCommerce subscription companies, the amount of the Debtors’ funded, trade, and tax debt, and the recent challenges of the Debtors’ operations due to liquidity shortfalls, made it difficult to entice investors. Breakwater was one of the parties interested, and it spent substantial time and incurred costs in mid-July 2019 doing diligence and working on preliminary deal documents. But its interest waned, and sale discussions ceased. (emphasis added)

Riiiiight. Why would that be? Because, like, nobody has figured out how to make these subscription businesses actually work?!? 🤔

It’s telling when the entity that knows you the best and has been through the ups and downs with you wants no part of you going forward. Godspeed, Loot Crate. May the loot be with you.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure: $15mm credit facility (Breakwater Credit Opportunities Fund LP)

  • Professionals:

    • Legal: Bryan Cave Leighton Paisner LLP (Brian Duedall, Leah Fiorenza McNeill, Andrew Schoulder, Khaled Tarazi) & Robinson & Cole LLP (Jamie Edmonson, Natalie Ramsey, Mark Fink)

    • Independent Directors: Alexandre Zyngier, Osman Khan

    • Financial Advisor/CRO: Portage Point Partners (Stuart Kaufman)

    • Investment Banker: FocalPoint Securities LLC

    • Chief Transformation Officer: Theseus Strategy Group (Mark Palmer)

    • Communications Consultant: Sitrick and Company

    • Claims Agent: Stretto (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Prepetition Convertible Noteholder & DIP Lender: Money Chest LLC

      • Legal: Bayard PA (Erin Fay)

New Chapter 11 Bankruptcy Filing - Z Gallerie LLC

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Z Gallerie LLC

March 10, 2019

In January's "What to Make of the Credit Cycle. Part 25. (Long Warning Signs)," we discussed the leveraged loan market and, among many other things, highlighted the then-recent reports that KKR was planning to cut its leveraged loan exposure.

It seems pretty safe to say that this decision was partially informed by KKR's recent experience managing the $2b ex-Blackstone loan fund, Franklin Square Investment Corp. According to reporting by The Financial Times back in December, the Franklin Square fund (now FS-KKR Capital Corp) wrote down five loans between April and December last year. That must be lovely news for investors in the publicly-traded business development corporation ($FSK). Per the FT:

"Executives at Blackstone’s GSO credit arm approved the original loans. But KKR is now responsible for collecting the cash and assessing the loans’ value, and has taken a much gloomier view of their prospects. It has placed 28 percent of the portfolio on a list of deals that require close monitoring or are at risk of losing money, according to securities filings.  

'KKR is a formidable group, but they probably weren’t anticipating the losses that came forth in the GSO book,' said Finian O’Shea, an analyst who covers private credit funds for Wells Fargo."

Strangely, this is obviously good news for professionals with restructuring experience:

"KKR’s credit division has been hiring restructuring specialists to beef up a dedicated team charged with salvaging value from troubled investments — a move that executives there say was planned when the FS-KKR portfolio began to deteriorate. KKR declined to comment, as did the fund’s co-manager, Franklin Square Investments."

Those specialists might get increasingly busy. FSK owned, as of December 31, 2018, first lien loans in Acosta Inc. (written down by the BDC's board to "fair value" from $19.2mm to $11.8mm), Charlotte Russe (yikes), CTI Foods (which was written down by $900k), and Z Gallerie (which had been written down from $31.9mm to $11.3mm). It also owns second lien paper in Belk Inc. (written down from $119.1mm to $94.7mm), CTI Foods, and Spencer Gifts LLC (written down from $30mm to $25.6mm). And subordinated debt in Sungard (written down by 80%). The BDC's equity holdings in Charlotte Russe and Nine West are now obviously worthless. 

Lots of people are focused on BDCs given lending standards during this long bull run. If that portfolio is any indication, they should be. 

*****

Speaking of Z Gallerie, it filed for bankruptcy last weekend in the District of Delaware. It is a specialty-niche furniture retailer that has 76 stores across select states in the US. And this is its second trip into bankruptcy in 10 years. While we think that's too large a spread to really be a "chapter 22," its an ignominious feat nonetheless. 

So another retailer in bankruptcy. We're all getting bored of this. And we're also getting bored of private equity firms helping drive companies into the ground. In this instance, Brentwood Associates, a $2.4b Los Angeles-based private equity purchased a 70% stake in the company in 2014 (and took two seats on the company's board of directors). At the time, Brentwood had this to say about the transaction:*

"Z Gallerie is a differentiated retailer in the home furnishings market with a very unique merchandise assortment. We see a significant opportunity to accelerate growth of the current retail store base."

But…well...not so much. This statement by the company's CRO is a pretty damning assessment of Brentwood's claim that they "build[] category-defining businesss through sustained, accelerated growth”:

"Following a transaction in 2014 in which the Zeidens sold majority control of Z Gallerie to Brentwood Associates (“Brentwood”), Z Gallerie’s overall performance has declined significantly. The reasons for these declines are mostly self-imposed: (i) a store footprint expansion did not meet performance targets, (ii) the addition of the Atlanta distribution center disrupted operations and increased costs, and (iii) the failure to timely invest enough capital in their e-commerce platform limited its growth. These missteps were exacerbated by macroeconomic trends in the brick and mortar retail industry and lower housing starts. As a result, net revenue and EBITDA declined during fiscal year 2018. With Z Gallerie’s current cash balances of less than $2 million, and no availability under its secured credit facilities, the commencement of these chapter 11 cases became necessary to ensure access to capital going forward."

 That's brutal. Something tells us that Z Gallerie is going to make a swift disappearance from Brentwood's website.

Anyway, the company includes all kinds of optimistic language in its bankruptcy filing papers about how, after it closes 17 stores and executes on its business plan, it will be poised for success. It intends to enhance its e-commerce (currently 20% of sales), revamp its Atlanta distribution center, launch social media campaigns (long Facebook), and better train its employees (long Toys R Us PTSD). The company claims numbers have already been on the upswing since the holidays, including February same-store sales up 5% YOY. 

Current optimism notwithstanding, make no mistake: this is yet another instance of value destruction. This is the company's balance sheet (at least some of which dates back to 2014 and is related to Brentwood's purchase):

Screen Shot 2019-03-13 at 9.15.20 AM.png

That $91mm senior secured term loan? Yeah, that's where KKR sits. 

The company has a commitment for a $28mm DIP credit facility from KeyBank which will effectively rollup the senior secured revolving loans and provide $8mm in new money. 

The company has already filed a "hot potato" plan of reorganization — in other words, the lenders will take the company if they have to, but they don't really want to, and so they're happy to pass it on — and have a banker actively trying to pass it on (Lazard Middle Market) — to some other schmuck who thinks they can give it a go. In other words, similar to the plan proposed earlier this year in the Shopko case, this plan provides for the equitization of the allowed secured revolver and term loan claims IF the company is otherwise unable to find a buyer to take it off their hands and pay down some of their loans with cash. The company filed bid procedures along with the plan; it does not have a stalking horse bidder lined up. The company estimates a 4 month timeline to complete its bankruptcy.

We can't imagine that KKR is stoked to own this company going forward. And we can only imagine what kind of projections the company will put forth to convince the court that this thing is actually feasible: the plan has a blank space for the exit facility so that exit structure is also apparently a work in progress.

In any event, given recent loan underwriting standards, KKR, and other BDCs, might want to get used to owning credits they never expected to. 

*Brentwood was represented in the transaction by Kirkland & Ellis LLP, now counsel to the company. The company drops in a footnote that any potential claims against Brentwood and its two directors will be conducted by Klehr Harrison Harvey Branzburg LLP, a firm we’re sure was hired with absolutely zero input by Kirkland and/or the two Brentwood directors. Two independent directors are currently sitting on the board.

  • Jurisdiction: District of Delaware (Judge: Laurie S. Silverstein)

  • Capital Structure: see above

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Justin Bernbrock, Joshua Altman, Emily Kehoe) & (local) Klehr Harrison Harvey Branzburg LLP (Dominic Pacetti, Michael Yurkewicz)

    • Financial Advisor: Berkeley Research Group LLC (Mark Weinsten)

    • Investment Banker: Lazard Middle Market LLC (Jason Cohen)

    • Claims Agent: Bankruptcy Management Solutions, Inc. d/b/a/ Stretto (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP Agent: Keybank NA

      • Legal: Buchanan Ingersoll & Rooney PC (Mary Caloway, Mark Pfeiffer)

    • KKR Credit Advisors US LLC

      • Legal: Proskauer Rose LLP (Vincent Indelicato, Christ Theodoridis) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Matthew Talmo)

👢New Chapter 11 Bankruptcy & CCAA Filing - Payless👢

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Payless Holdings LLC

February 18, 2019

Update coming on Wednesday.

  • Jurisdiction: E.D. of Missouri (Judge Surratt-States)

  • Professionals:

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Meredith Lahaie, Kevin Zuzolo, Julie Thompson, Caitlin Griffin, Patrick Chen, Abid Qureshi) & (local) Armstrong Teasdale LLC (Richard Engel Jr., Erin Edelman, John Willard)

    • Legal (Canadian CCAA): Cassels Brock & Blackwell LLP

    • Legal (Independent Managers): Seward & Kissel LLP

    • Board of Directors: Heath Freeman, Martin Wade, R. Joseph Fuchs, Scott Vogel, Patrick Bartels

    • Financial Advisor: Ankura Consulting Group LLC (Stephen Marotta, Adrian Frankum, Swapna Deshpande)

    • Investment Banker: PJ Soloman LP (Derek Pitts)

    • Asset Disposition Advisor: Malfitano Advisors LLC (Joseph Malfitano)

    • Liquidators: Great American Group LLC and Tiger Capital Group LLC

    • Corporate Communications Consultant: Reevemark LLC

    • Real Estate Advisors: A&G Realty Partners

    • CCAA Monitor: FTI Consulting Inc.

    • CCAA Monitor

      • Legal: Bennett Jones

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Pre-petition ABL Agent: Wells Fargo NA

    • Pre-petition Term Agent: Cortland Products Corp.

🏠New Chapter 11 Bankruptcy Filing - Decor Holdings Inc.🏠

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Decor Holdings Inc.

February 12, 2019

Source: https://www.robertallendesign.com

Source: https://www.robertallendesign.com

Privately-owned New York-based Decor Holdings Inc. (d/b/a The RAD Group and The Robert Allen Duralee Group) and certain affiliates companies filed for bankruptcy earlier this week in the Eastern District of New York. The debtors state that they are the second largest supplier of decorative fabrics and furniture to the design industry in the U.S., designing, manufacturing and selling decorative fabrics, wall coverings, trimmings, upholstered furniture, drapery hardware and accessories for both residential and commercial applications. All of which begs the question: do people still actually decorate with this stuff?!? In addition to private label product lines, the company represents six other furnishing companies, providing tens of thousands of sku options to design professionals and commercial customers. The company maintains a presence via showrooms in large metropolitan cities in the US and Canada as well as an agent showroom network in more than 30 countries around the world. In other words, for a company you’ve likely never heard of, they have quite the reach.

The debtors’ problems derive from a 2017 merger between the Duralee business and the Robert Allen business. Why? Well, frankly, it sounds like the merger between the two is akin to a troubled married couple that decides that having a kid will cure all of their ills. Ok, that’s a terrible analogy but in this case, both companies were already struggling when they decided that a merger between the two might be more sustainable. But, “[l]ike many industries, the textile industry has been hard hit by the significant decrease in consumer spending and was severely affected by the global economic downturn. As a result, the Debtors experienced declining sales and profitability over the last several years.” YOU MEAN THE PERCEIVED SYNERGIES AND COMBINED EFFICIENCIES DIDN’T COME TO FRUITION?!? Color us shocked.

Ok, we’re being a little harsh. The debtors were actually able to cut $10-12mm of annual costs out of the business. They could not, however, consolidate their separate redundant showroom spaces outside of bankruptcy (we count approximately 32 leases). Somewhat comically, the showroom spaces are actually located in the same buildings. Compounding matters was the fact that the debtors had to staff these redundant spaces and failed to integrate differing software and hardware systems. In an of themselves, these were challenging problems even without a macro overhang. But there was that too: “…due to a fundamental reduction of market size in the home furnishings market, sales plummeted industry wide and the Debtors were not spared.” Sales declined by 14% in each of the two years post-merger. (Petition Note: we can’t help but to think that this may be the quintessential case of big firm corporate partners failing to — out of concern that management might balk at the mere introduction of the dreaded word ‘bankruptcy’ and the alleged stigma attached thereto — introduce their bankruptcy brethren into the strategy meetings. It just seems, on the surface, at least, that the 2017 merger might have been better accomplished via a double-prepackaged merger of the two companies. If Mattress Firm could shed leases in its prepackaged bankruptcy, why couldn’t these guys? But what do we know?).

To stop the bleeding, the debtors have been performing triage since the end of 2018, shuttering redundant showrooms, stretching payables, and reducing headcount by RIF’ing 315 people. Ultimately, however, the debtors concluded that chapter 11 was necessary to take advantage of the breathing spell afforded by the “automatic stay” and pursue a going concern sale. To finance the cases, the debtors obtained a commitment from Wells Fargo Bank NA, its prepetition lender, for a $30mm DIP revolving credit facility of which approximately $6mm is new money and the remainder is a “roll-up” or prepetition debt (PETITION Note: remember when “roll-ups” were rare and frowned upon?). The use of proceeds will be to pay operating expenses and the costs and expenses of being in chapter 11: interestingly, the debtors noted that they’re administratively insolvent on their petition. 🤔

Here’s to hoping for all involved that a deep-pocked buyer emerges out of the shadows.

  • Jurisdiction: E.D. of New York (Judge Grossman)

  • Capital Structure: $23.7mm senior secured loan (Wells Fargo Bank NA), $5.7mm secured junior loan (Corber Corp.)

  • Professionals:

    • Legal: Hahn & Hesson LLP (Mark Power, Janine Figueiredo)

    • Conflicts Counsel: Halperin Battaglia Benzija LLP (Christopher Battaglia)

    • Financial Advisor: RAS Management Advisors LLC (Timothy Boates)

    • Investment Banker: SSG Capital Advisors LLC (J. Scott Victor)

    • Liquidator: Great American Group LLC

    • Claims Agent: Omni Management Group Inc. (*click on the link above for free docket access)

  • Other Professionals:

    • DIP Agent: Wells Fargo Bank NA

      • Legal: Otterbourg P.C. (Daniel Fiorillo, Jonathan Helfat)

    • Subordinated Noteholder: Corber Corp.

      • Legal: Pachulski Stang Ziehl & Jones LLP (John Morris, John Lucas)

New Chapter 11 Bankruptcy Filing - Things Remembered Inc.

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Things Remembered Inc.

2/6/19

This has been a rough week for "out-of-court" restructurings in the retail space. On the heals of Charlotte Russe's collapse into bankruptcy after an attempted out-of-court solution, Things Remembered Inc. filed for bankruptcy in the District of Delaware on February 6, 2019. We recently wrote about Things Remembered here. Let's dig in a bit more. 

The 53-year old retailer filed with a stalking horse purchaser, Ensco Properties LLC, in line to purchase, subject to a tight 30-day timeframe, a subset of the company's store footprint and direct-sales business. The company writes in the most Trumpian-fashion imaginable:

"Although stores not acquired will need to close, the going-concern sale wills save hundreds of jobs and potentially many more and provide an improved, and significantly less risky, recovery to stakeholders." What does "potentially many more" mean? Don't they know how many people are employed at the locations being sold as well as corporate support? Seems like a Trumpian ad lib of corresponding inexactitude. But, whatever. 

What caused the need for bankruptcy?

"Like many other retailers, the Company has suffered from adverse macro-trends, as well as certain microeconomic operational challenges. Faced with these challenges, the Company initiated multiple go-forward operational initiatives to increase brick-and-mortar profitability, such as store modernization through elimination of paper forms and the addition of iPads to streamline the personalization and sale process, and by shuttering a number of underperforming locations. The Company also sought to bolster the Debtors’ online-direct sale business, including aggressive marketing to loyal customers to facilitate sales through online channels, attracting new customers via an expanded partnership with Amazon, and increasing service capabilities for the business-to-business customer segment."

Read that paragraph and then tell us that retail management teams (and their expensive advisors) have any real clue how to combat the ails confronting retail. Elimination of paper forms? Ipads? Seriously? Sure, the rest sounds sensible and comes right out of today's standard retail playbook, i.e., shutter stores, bolster online capabilities, leverage Amazon's distribution, tapping into "loyal customers," etc. We're surprised they didn't mention AR/VR, Blockchain, "experiential retail," pop-ups, advertising on scooters, loyalty programs, and all of the other trite retail-isms we've heard ad nauseum (despite no one actually proving whether any or all of those things actually drive revenue). 

The rest of the story is crazy familiar by this point. The "challenging operating environment" confronting brick-and-mortar and mall-based retail, specifically, led to missed sales targets and depressed profitability. Naturally there were operational issues that compounded matters and, attention Lenore Estrada (INSERT LINK), "…vendors have begun to place pressure on the supply chain cost structure by delaying or cancelling shipments until receiving payment." Insert cash on delivery terms here. Because that's what they should do when a customer is mid-flush. 

Anyway, shocker: negative cash flows persisted. Consequently, the company and its professionals commenced a marketing process that landed Enesco as stalking horse bidder. Enesco has committed to acquiring the direct-sales business (which constitutes 26% of all sales in 2018 and includes the e-commerce website, hq, fulfillment and distribution center in Ohio and related assets) and approximately 128 stores (subject to addition or subtraction, but a floor set at 50 store minimum). Store closings of approximately 220 stores and 30 kiosks commenced pre-petition. A joint venture between Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC is leading that effort (which again begs the question as to how Gymboree is the only recent retailer that required the services of four "liquidators"). The purchase price is $17.5mm (subject to post-closing adjustments). $17.5mm is hardly memorable. That said, the company did have negative $4mm EBITDA so, uh, yeeeeeaaaaah. 

$18.7mm '19 revolving credit facility (Cortland Capital Markets Services LLC); $124.9mm 12% '20 TL. 

The capital structure represents the result of an August 30, 2016 out-of-court exchange that, let's be honest here, didn't do much other than incrementally lessen the debt burden, kick the can down the road and get some professionals paid. If this sounds familiar, it's because it's not all that different than Charlotte Russe in those respects. 

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: $mm debt     

  • Company Professionals:

    • Legal: Kirkland & Ellis LLP (Christopher Greco, Derek Hunger, Angela Snell, Spencer Winters, Catherine Jun, Scott Vail, Mark McKane) & (local) Landis Rath & Cobb LLP (Adam Landis, Matthew McGuire, Kimberly Brown, Matthew Pierce)

    • Legal (Canada): Davies Ward Phillips & Vineberg LLP

    • Financial Advisor/CRO: Berkeley Research Group LLC (Robert Duffy, Brett Witherell)

    • Investment Bank: Stifel Nicolaus & Co. Inc. and Miller Buckfire & Co. LLC (James Doak)

    • Liquidators: Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC

      • Legal: Pepper Hamilton LLP (Douglas Herman, Marcy McLaughlin)

    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Stalking Horse Purchaser: Enesco Properties LLC  (Balmoral Funds LLC)

      • Legal: Pachulski Stang Ziehl & Jones LLP (Jeffrey Pomerantz, Maxim Litvak, Joseph Mulvihill)

    • Lender: Cortland Capital Market Services LLC

      • Legal: Weil Gotshal & Manges LLP (David Griffiths, Lisa Lansio) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, Zachary Shapiro)

    • Sponsor: KKR & Co.

    • Official Committee of Unsecured Creditors (Jewelry Concepts Inc., Gravotech Inc., Chu Kwun Kee Metal Manufactory, Brookfield Property REIT, Inc., Simon Property Group LP)

      • Legal: Kelley Drye & Warren LLP (Eric Wilson, Jason Adams, Kristin Elliott, Lauren Schlussel) & (local) Connolly Gallagher (N. Christopher Griffiths, Shaun Michael Kelly)

      • Financial Advisor: Province Inc. (Carol Cabello, Sanjuro Kietlinski, Jorge Gonzalez, Michael Martini)

New Chapter 11 Bankruptcy Filing - FULLBEAUTY Brands Holdings Corp.

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FULLBEAUTY Brands Holdings Corp.

February 3, 2019

We’re going to regurgitate our report about FULLBEAUTY Brands Holdings Corp. from January 6th after the company publicly posted its proposed plan of reorganization and disclosure statement and issued a press release about its proposed restructuring. What follows is what we wrote then:

FULLBEAUTY Brands Inc., an Apax Partners’ disaster…uh, “investment”…will, despite earlier reports of an out-of-court resolution to the contrary, be filing for bankruptcy after all in what appears to be either a late January or an early February filing after the company completes its prepackaged solicitation of creditors. Back in May in “Plus-Size Beauty is a Plus-Size Sh*tfest (Short Apax Partners’ Fashion Sense),” we wrote:

Here’s some free advice to our friends at Apax Partners: hire some millennials. And some women. When you have 23 partners worldwide and only 1 of them is a woman (in Tel Aviv, of all places), it’s no wonder that certain women’s apparel investments are going sideways. Fresh off of the bankruptcies of Answers.com and rue21, another recent leveraged buyout by the private equity firm is looking a bit bloated: NY-based FullBeauty Brands, a plus-size direct-to-consumer e-commerce and catalogue play with a portfolio of six brands (Woman Within, Roamans, Jessica London, Brylane Home, BC Outlet, Swimsuits for All, and Eilos).

Wait. Hold up. Direct-to-consumer? Check. E-commerce? Check. Isn’t that, like, all the rage right now? Yes, unless you’re levered to the hilt and have a relatively scant social media presence. Check and check.

Per a press release on Thursday, the company has an agreement with nearly all of its first-lien-last out lenders, first lien lenders, second lien lenders and equity sponsors on a deleveraging transaction that will shed $900mm of debt from the company’s balance sheet. It also has a commitment for $30mm in new liquidity in the form of a new money term loan with existing lenders. Per Bloomberg:

About 87.5 percent of the common reorganized equity would go to first-lien lenders, 10 percent to second liens, and 2.5 percent to the sponsor, according to people with knowledge of the plan who weren’t authorized to speak publicly.

Which, in English, means that Oaktree Capital Group LLC, Goldman Sachs Group Inc., and Voya Financial Inc. will end up owning this retailer. Your plus-sized clothing, powered by hedge funds. Apax and Charlesbank Capital, the other PE sponsor, stand to maintain 2.5% of the equity which, from our vantage point, appears rather generous (PETITION Note: there must be a decent amount of cross-holdings between the first lien and second lien debt for that to be the case). Here is the difference in capital structure:

Screen Shot 2019-02-04 at 7.06.26 PM.png

What’s the story here? Simply put, it’s just another retail with far too much leverage in this retail environment.

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Of course, there’s the obligatory product strategy, inventory control, and e-commerce excuses as well. Not to mention…wait for it…Amazon Inc ($AMZN)!

“In addition to these operational hurdles, FullBeauty has also faced competition from online retail giant Amazon, Inc. and retail chains, including Walmart Inc. and Kohl’s Corporation, that have recently entered the plus-size clothing space.”

Kirkland & Ellis LLP, PJT Partners ($PJT) and AlixPartners represent the company.

We give bankruptcy professionals grief all of the time for what often appears to be fee extraction in various cases. In our view, there have been some pretty egregious examples of inefficiency in the system and, considering a number of our readers are management teams of distressed companies, we feel it’s imperative that we cure for a blatant information dislocation and help educate the masses. This, though, appears to be an extraordinary case. In the other direction.

The company’s professionals here propose to confirm the company’s plan of reorganization at the first day hearing of the case. As Bloomberg noted on Monday, this would “set a new record for emerging from court protection in under 24 hours.” Bloomberg reports:

The previous record for the fastest Chapter 11 process is held by Blue Bird Body Co., which exited bankruptcy in 2006 in less than two days. Fullbeauty and its advisers aim to beat that mark.

“We structured this deal as if bankruptcy never happened for our trade creditors, vendors and employees to avoid further disruption to the company,” attorney Jon Henes at Kirkland & Ellis, the company’s legal counsel, said in an interview. “In this situation, every day in court is another day of costs without any corresponding benefit.”

In fact, this case would be so quick that, as you read this (on Wednesday), Judge Drain may have already given the plan his blessing. This makes Roust Corporation Inc. (6 days) and Southcross Holdings (13 days) look like child’s play. For that reason — and that reason alone — we’ll forgive the company’s professionals for their blatant victory lap: it’s curious that Bloomberg had a completed interview ready to go at 9:26am on the morning of the company’s bankruptcy filing. Clearly Kirkland & Ellis LLP, PJT Partners LP ($PJT) and Houlihan Lokey Capital ($HL) want to milk this extraordinary result for all it’s worth. We can’t really blame them, truthfully. That is, unless and/or until the company violates the “Two Year Rule” a la Charlotte Russe.

Anyway, why so quick? Well, because they can: the entire capital structure is on board with the proposed plan and trade will ride through unimpaired and paid. All contracts will be assumed. There are no brick-and-mortar stores to deal with: this is a web and catalogue-based business. Like we said, this case is extraordinary. Per the Company:

It is in the best interest of the estates that the Debtors remain in bankruptcy for as short a time-period as possible. If FullBeauty is forced to remain in chapter 11 longer than necessary, it may be required to seek debtor in possession financing, which would cost the Debtors unnecessary bank fees and professional expenses. In addition, although January has been relatively smooth in terms of vendor outreach, FullBeauty expects that trade could contract very quickly if the company remains in chapter 11 longer than necessary—particularly because many vendors are in foreign jurisdictions and they do not understand the nuances of prepackaged cases versus longer prearranged or traditional chapter 11 cases. Every day that FullBeauty remains in chapter 11 results in cash spent that could go to developing the business.

Indeed, for once, it appears that the best interests of the debtor company were, indeed, heeded.*

*Which is not to say that we believe the out-of-court bills will be light.

  • Jurisdiction: S.D. of New York (Judge Drain)

  • Capital Structure: $mm debt     

  • Company Professionals:

    • Legal: Kirkland & Ellis LLP (Jonathan Henes, Emily Geier, George Klidonas, Rebecca Blake Chaikin, Nicole Greenblatt)

    • Independent Director: Mohsin Meghji

    • Financial Advisor: AlixPartners LLC

    • Investment Banker: PJT Partners LP (Jamie Baird)

    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Financial Sponsor (69.6%): Apax Partners LLP

      • Legal: Simpson Thatcher & Bartlett LLP (Elisha Graff, Nicholas Baker)

    • Financial Sponsor (26.4%): Charlesbank Capital Partners LLC

      • Legal: Goodwin Proctor LLP (William Weintraub, Joseph Bernardi Jr.)

    • ABL Agent & FILO Agent: JPMorgan Chase Bank NA

      • Legal: Davis Polk & Wardwell LLP (Darren Klein, Aryeh Falk)

    • First Lien Agent & Second Lien Agent: Wilmington Trust NA

      • Legal: Shipman & Goodman LLP (Nathan Plotkin, Eric Goldstein, Marie Pollio)

    • Ad Hoc Group of First Lien Term Loan Lenders

      • Legal: Milbank Tweed Hadley & McCloy LLP (Dennis Dunne, Gerard Uzzi, Nelly Almeida)

      • Financial Advisor: Ducera Partners

    • Ad Hoc Group of Second Lien Term Loan Lenders

      • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Elizabeth McColm, Christopher Hopkins)

      • Financial Advisor: Houlihan Lokey Capital Inc. (Saul Burian)

Updated 2/4/19 at 7:03 CT

New Chapter 11 Bankruptcy Filing - Charlotte Russe Holding Inc.

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Charlotte Russe Holding Inc.

February 3, 2019

San Diego-based specialty women’s apparel fast-fashion retailer Charlotte Russe Holding Inc. is the latest retailer to file for bankruptcy. The company has 512 stores in 48 U.S. states. The company owns a number of different brands that it sells primarily via its brick-and-mortar channel; it has some brands, most notably “Peek,” which it sells online and wholesale to the likes of Nordstrom.

The company’s capital structure consists of:

  • $22.8mm 6.75% ‘22 first lien revolving credit facility (ex-accrued and unpaid interest, expenses and fees)(Bank of America NA), and

  • $150mm 8.5% ‘23 second lien term loan ($89.3mm funded, exclusive of unpaid interest, expenses and fees)(Jefferies Finance LLC). The term loan lenders have first lien security interests in the company’s intellectual property.

The company’s trajectory over the last decade is an interesting snapshot of the trouble confronting the brick-and-mortar retail space. The story begins with a leveraged buyout. In 2009, Advent International acquired the debtors through a $380mm tender offer, levering up the company with $175mm in 12% subordinated debentures in the process. At the time, the debtors also issued 85k shares of Series A Preferred Stock to Advent and others. Both the debentures and the Preferred Stock PIK’d interest (which, for the uninitiated, means that the principal or base amounts increased by the respective percentages rather than cash pay interest or dividends being paid over time). The debtors later converted the Preferred Stock to common stock.

Thereafter, the debtors made overtures towards an IPO. Indeed, business was booming. From 2011 through 2014, the debtors grew considerably with net sales increased from $776.8mm to $984mm. During this period, in May of 2013, the debtors entered into the pre-petition term loan, used the proceeds to repay a portion of the subordinated debentures and converted the remaining $121.1mm of subordinated debentures to 8% Preferred Stock (held by Advent, management and other investors). In March 2014, the debtors and its lenders increased the term loan by $80mm and used the proceeds to pay a one-time dividend. That’s right folks: a dividend recapitalization!! WE LOVE THOSE. Per the company:

In May 2014, the Debtors paid $40 million in dividends to holders of Common Stock, $9.8 million in dividends to holders of Series 1 Preferred Stock, which covered all dividends thus far accrued, and paid $65.7 million towards the Series 1 Preferred Stock principal. The Debtors’ intention was to use a portion of the net proceeds of the IPO to repay a substantial amount of the then approximately $230 million of principal due on the Prepetition Term Loan.

In other words, Advent received a significant percentage of its original equity check back by virtue of its Preferred Stock and Common Stock holdings.

Guess what happened next? Well, after all of that money was sucked out of the business, performance, CURIOUSLY, began to slip badly. Per the company:

Following fifteen (15) consecutive quarters of increased sales, however, the Debtors’ performance began to materially deteriorate and plans for the IPO were put on hold. Specifically, gross sales decreased from $984 million in fiscal year 2014 with approximately $93.8 million in adjusted EBITDA, to $928 million in fiscal year 2017 with approximately $41.2 million in adjusted EBITDA. More recently, the Debtors’ performance has materially deteriorated, as gross sales decreased from $928 million in fiscal year 2017 with approximately $41.2 million in adjusted EBITDA, to an estimated $795.5 million in fiscal year 2018 with approximately $10.3 million in adjusted EBITDA.

Consequently, the company engaged in a year-long process of trying to address its balance sheet and/or find a strategic or financial buyer. Ultimately, in February 2018, the debtors consummated an out-of-court restructuring that (i) wiped out equity (including Advent’s), (ii) converted 58% of the term loan into 100% of the equity, (iii) lowered the interest rate on the remaining term loan and (iv) extended the term loan maturity out to 2023. Advent earned itself, as consideration for the cancellation of its shares, “broad releases” under the restructuring support agreement. The company, as part of the broader restructuring, also secured substantial concessions from its landlords and vendors. At the time, this looked like a rare “success”: an out-of-court deal that resulted in both balance sheet relief and operational cost containment. It wasn’t enough.

Performance continued to decline. Year-over-year, Q3 ‘18 sales declined by $35mm and EBITDA by $8mm. Per the company:

The Debtors suffered from a dramatic decrease in sales and in-store traffic, and their merchandising and marketing strategies failed to connect with their core demographic and outpace the rapidly evolving fashion trends that are fundamental to their success. The Debtors shifted too far towards fashion basics, did not effectively reposition their e-commerce business and social media engagement strategy for success and growth, and failed to rationalize expenses related to store operations to better balance brick-and-mortar operations with necessary e-commerce investments.

In the end, bankruptcy proved unavoidable. So now what? The company has a commitment from its pre-petition lender, Bank of America NA, for $50mm in DIP financing (plus $15mm for LOCs) as well as the use of cash collateral. The DIP will roll-up the pre-petition first lien revolving facility. This DIP facility is meant to pay administrative expenses to allow for store closures (94, in the first instance) and a sale of the debtors’ assets. To date, however, despite 17 potential buyers executing NDAs, no stalking horse purchaser has emerged. They have until February 17th to find one; otherwise, they’re required to pursue a “full chain liquidation.” Notably, the debtors suggested in their bankruptcy petitions that the estate may be administratively insolvent. YIKES. So, who gets screwed if that is the case?

Top creditors include Fedex, Google, a number of Chinese manufacturers and other trade vendors. Landlords were not on the top 30 creditor list, though Taubman Company, Washington Prime Group Inc., Simon Property Group L.P., and Brookfield Property REIT Inc. were quick to make notices of appearance in the cases. In total, unsecured creditors are owed approximately $50mm. Why no landlords? Timing. Despite the company going down the sh*tter, it appears that the debtors are current with the landlords (and filing before the first business day of the new month helps too). Not to be cynical, but there’s no way that Cooley LLP — typically a creditors’ committee firm — was going to let the landlords be left on the hook here.

And, so, we’ll find out within the next two weeks whether the brand has any value and can fetch a buyer. In the meantime, Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC will commence liquidation sales at 90+ locations. We see that, mysteriously, they somehow were able to free up some bandwidth to take on an new assignment sans a joint venture with literally all of their primary competitors.

  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure: $22.8mm 6.75% ‘22 first lien revolving asset-backed credit facility (ex-accrued and unpaid interest, expenses and fees)(Bank of America NA), $150mm 8.5% ‘23 second lien term loan ($89.3mm funded, exclusive of unpaid interest, expenses and fees)(Jefferies Finance LLC)

  • Company Professionals:

    • Legal: Cooley LLP (Seth Van Aalten, Michael Klein, Summer McKee, Evan Lazerowitz, Joseph Brown) & (local) Bayard PA (Justin Alberto, Erin Fay)

    • Independent Director: David Mack

    • Financial Advisor/CRO: Berkeley Research Group LLC (Brian Cashman)

    • Investment Banker: Guggenheim Securities LLC (Stuart Erickson)

    • Lease Disposition Consultant & Business Broker: A&G Realty Partners LLC

    • Liquidating Agent: Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC

    • Liquidation Consultant: Malfitano Advisors LLC

    • Claims Agent: Donlin Recano & Company (*click on company name above for free docket access)

  • Other Parties in Interest:

    • DIP Lender ($50mm): Bank of America NA

      • Legal: Morgan Lewis & Bockius LLP (Julia Frost-Davies, Christopher Carter) & (local) Richards Layton & Finger PA (Mark Collins)

    • Prepetition Term Agent: Jefferies Finance LLC

      • Legal: King & Spalding LLP (Michael Rupe, W. Austin Jowers, Michael Handler)

    • Official Committee of Unsecured Creditors (Valueline Group Co Ltd., Ven Bridge Ltd., Shantex Group LLC, Global Capital Fashion Inc., Jainson’s International Inc., Simon Property Group LP, Brookfield Property REIT Inc.)

      • Legal: Whiteford Taylor & Preston LLP (Christopher Samis, L. Katherine Good, Aaron Stulman, David Gaffey, Jennifer Wuebker)

      • Financial Advisor: Province Inc. (Edward Kim)

Updated 2/14/19 at 1:41 CT

𝟚𝟚 New Chapter 22 Bankruptcy Filing - Gymboree Group Inc. 𝟚𝟚

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Gymboree Group, Inc.

January 16, 2019

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So, uh, THAT didn’t age well.

Let’s be clear here: the Gymboree situation is an unmitigated disaster and, in our view, has not — in the wake of all of the news surrounding Sears Holding Corporation ($SHLDQ) and PG&E Corporation ($PCG) — gotten the attention it deserves. That’s where we come in. Let’s hop in the DeLorean.

TO READ THE REST OF THIS REPORT, YOU MUST BE A MEMBER. BECOME ONE HERE.

  • Jurisdiction: E.D. of Virginia

  • Capital Structure: $79.1mm senior secured ABL (Bank of America NA), $44.5mm LOCs under ABL, $89mm TL

  • Company Professionals:

    • Legal: Milbank Tweed Hadley & McCloy LLP (Dennis Dunne, Evan Fleck, Michael Price) & (local) Kutak Rock LLP (Michael Condyles, Peter Barrett, Jeremy Williams, Brian Richardson)

    • Independent Directors: Eugene Davis, Scott Vogel

    • Financial Advisor/CRO: Berkeley Research Group LLC (Steven Coulombe)

    • Investment Banker: Stifel Nicolaus & Co. & Miller Buckfire & Co.

    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Gymboree Canada

      • Legal: Norton Rose Fulbright Canada LLP

      • Proposal Trustee: KPMG Inc.

        • Legal: Osler Hoskin & Harcourt LLP

    • ABL Agent: Bank of America NA

      • Legal: Morgan Lewis & Bockius LLP

    • Prepetition Term Loan Agent (Goldman Sachs Specialty Lending Group Inc.) & Term DIP Agent and Term Lender (Special Situations Investing Group Inc.)

      • Legal: King & Spalding (W. Austin Jowers, Christopher Boies, Michael Handler) & (local) McGuireWoods LLP (Dion Hayes, Douglas Foley, Sarah Boehm)

New Chapter 11 Bankruptcy Filing - Specialty Retail Shops Holding Corp. (Shopko)

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Specialty Retail Shops Holding Corp. (Shopko)

January 16, 2019

Sun Capital Partners’-owned, Wisconsin-based, Specialty Retail Shops Holding Corp. (“Shopko”) filed for bankruptcy on January 16, 2019 in the District of Nebraska. Yes, the District of Nebraska. Practitioners in Delaware must really be smarting over that one. That said, this is not the first retail chapter 11 bankruptcy case shepherded by Kirkland & Ellis LLP in Nebraska (see, Gordman’s Stores circa 2017). K&E must love the native Kool-Aid. Others, however, aren’t such big fans: the company’s largest unsecured creditor, McKesson Corporation ($MCK), for instance. McKesson is a supplier of the company’s pharmacies and is a large player in the healthcare business, damn it; they spit on Kool-Aid; and they have already filed a motion seeking a change of venue to the Eastern District of Wisconsin. They claim that venue is manufactured here on the basis of an absentee subsidiary. How dare they? Nobody EVER venue shops. EVER!

Anyway, we’ve gotten ahead of our skis here…

The company operates approximately 367 stores (125 bigbox, 235 hometown, and 10 express stores) in 25 states throughout the United States; it employs…

TO READ THE REST OF THIS REPORT, YOU MUST BE A MEMBER. BECOME ONE HERE.

  • Jurisdiction: D. of Nebraska

  • Capital Structure: see report.    

  • Company Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Patrick Nash Jr., Jamie Netznik, Travis Bayer, Steven Serajeddini, Daniel Rudewicz) & (local) McGrath North Mullin & Kratz P.C. LLO (James Niemeier, Michael Eversden, Lauren Goodman)

    • Board of Directors: Russell Steinhorst (CEO), Casey Lanza, Donald Roach, Mohsin Meghji, Steve Winograd

    • Financial Advisor: Berkeley Research Group LLC

    • Investment Banker: Houlihan Lokey Capital Inc. (Stephen Spencer)

    • Liquidation Consultant: Gordon Brothers Retail Partners LLC

      • Legal: Riemer & Braunstein LLP (Steven Fox)

    • Real Estate Consultant: Hilco Real Estate LLC

    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)

  • Special Committee of the Board of Directors

    • Legal: Willkie Farr & Gallagher LLP

    • Financial Advisor: Ducera Partners LLC

  • Other Parties in Interest:

    • Wells Fargo Bank NA

      • Legal: Otterbourg PC (Chad Simon) & (local) Baird Holm LLP (Brandon Tomjack)

    • Official Committee of Unsecured Creditors (HanesBrands Inc., Readerlink Distribution Services LLC, Home Products International NA, McKesson Corp., Notations Inc., LCN SKO OMAHA (MULTI) LLC, Realty Income Corporation)

      • Legal: Pachulski Stang Ziehl & Jones LLP (Jeffrey Pomerantz, Bradford Sandler, Alan Kornfeld, Robert Feinstein) & (local) Goosmann Law Firm PLC (Joel Carney)

      • Financial Advisor: FTI Consulting Inc. (Conor Tully)

      • Expert Consultant: The Michel-Shaked Group (Israel Shaked)

Updated 3/9/19

💒New Chapter 11 Bankruptcy Filing - David's Bridal💒

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David’s Bridal

November 19, 2018

We’ve previously written about PA-based David’s Bridal Inc. here and here and here: this bankruptcy has been a long time coming. But only recently has it come to light that there might be a consensual deal attached to any potential bankruptcy filing and, per the reports, that does appear to be the case. The company (and certain affiliates) filed for bankruptcy in the District of Delaware with a prepackaged plan of reorganization. If this flows through as planned (with a hoped for “Effective Date” of January 14), this will be a positive result that leaves trade vendors and employees paid in full and brides-to-be with their gowns without disruption. Thank G-d. In a day with rage all over the place, the last thing we need is more stress out there. And with 311 stores and 9,260 employees and given the general retail environment, consensual deals cannot be taken for granted.

While there is an underlying current of retail malaise here, this is primarily a balance sheet story. Why? Well…c’mon now…you know the answer: PRIVATE EQUITY!! In 2012, affiliates of Clayton, Dubilier & Rice, LLC (“CD&R”) purchased the company from another private equity firm, Leonard Green & Partners, L.P., which had previously purchased the company from Federated Department Stores Inc. Leonard Green 1. CD&R 0. Per the Company:

The Debtors’ current capital structure was put into place on or about October 11, 2012 as part of CD&R’s acquisition of David’s Bridal and certain of its affiliates. As of the Petition Date, the Company’s debt obligations include (i) approximately $25.7 million in drawn commitments under the Prepetition ABL Agreement; (ii) an estimated $481.2 million in outstanding principal obligations under the Prepetition Term Loan Agreement; and (iii) an estimated $270.0 million in outstanding principal obligations under the Unsecured Notes.

And here they are: in bankruptcy court due to too much debt and upcoming maturities. Bravo CD&R. The company also notes:

Despite the significant headwinds facing the brick-and-mortar retail industry, over the past several years, the Debtors have experienced steady financial performance and only modest loss of market share. The vast majority of David’s Bridal stores generate positive EBITDA, and the Debtors have historically generated stable operating cash flows. The most significant factor leading to the commencement of these chapter 11 cases is the amount of debt on the Debtors’ balance sheet, most of which will mature with the next 12 months.

David’s Bridal reported adjusted EBITDA of approximately $83.0 million for the fiscal year ended December 31, 2017 and of approximately $77.7 million for the first nine months of 2018. In fact, the vast majority of the stores in their fleet reportedly have profitable 4-wall EBITDA. So…uh…maybe we were…gulp…wrong…and maybe millennials actually do want wedding dresses…? 😳😳

Significantly, this IS a retail bankruptcy but this is NOT an “Amazon Effect” story. In fact, David’s Bridal MAKES money off of Amazon Inc. ($AMZN) and others, through an “affiliate relationship” pursuant to which David’s Bridal earns revenue by referring traffic to Amazon (and other sites like Men’s Wearhouse, Macy’s, Shutterfly, Marriott and Carnival).

The upshot of all of this is that the company claims it will dramatically cut the $777mm of funded debt. The company notes:

The restructuring contemplates a substantial deleveraging that will reduce the Debtors’ funded indebtedness from approximately $777 million to approximately $343 million (based upon currently anticipated borrowings on under an exit ABL facility at the Effective Date, which are subject to change).

Here’s how:

  • The prepetition ABL lenders will roll their prepetition facility into a $125mm ABL DIP credit facility;

  • The prepetition term lenders will provide a $60mm term loan DIP credit facility and swap their $481mm term loan for (i) the “vast majority” (75.5%) of the reorganized company’s common stock, (ii) a new “takeback” exit term loan of around $240-260mm and (iii) rights to participate in a $40-60mm priority exit term loan facility that takes out the DIP term loan and obtain (15%) additional stock;

  • The prepetition holders of unsecured notes will get the remaining (8.75%) common stock and warrants to capture potential upside; and

  • CD&R will get themselves a big-a$$ tax writeoff (if this hasn’t been written down already), presumably some angry limited partners, and some legal releases for playing ball in the consensual deal (including by waiving approximately $1mm of accrued management fees and expense reimbursements).

Now, we’re having a hard time figuring out how a $125mm exit ABL facility, $40-60mm in exit priority term loans, and $240-260mm in takeback paper equates to “$343 million” but, well, we guess lawyers draft these declarations, plans and disclosure statements and they ought to be given a reasonable mathematical margin of error. Plus, to be fair, they’re only talking about “funded” indebtedness and so the ABL likely won’t be tapped — as it wasn’t prepetition — to the full extent of availability. Still, they are understating the extent of the post-emergence balance sheet to some degree.

Finally, CD&R is a holder of unsecured notes. Which, per the third bulletpoint above, means that, despite effectively crushing this company with a burdensome amount of debt and driving this sucker into bankruptcy, they will continue to own a piece of the reorganized David’s Bridal going forward. Your wedding, powered by private equity.

As we say over and over again: G-d bankruptcy is beautiful.

  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure: $125mm ABL ($25.7mm funded - Bank of America NA), $481mm TL (Bank of America NA), $270mm ‘20 7.75% senior unsecured notes (Wilmington Trust NA)

  • Company Professionals:

    • Legal: Debevoise & Plimpton LLP (M. Natasha Labovitz, Nick Kaluk III, Daniel Stroik, Craig Bruens) & (local) Young Conaway Stargatt & Taylor LLP (Robert Brady, Edmon Morton, Jaime Luton Chapman, Tara Pakrouh)

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Evercore Group LLC (Stephen Goldstein)

      • Legal: DLA Piper LLP (Richard Chesley, Jamila Willis, Maris Kandestin)

    • Independent Auditors: KPMG LLP

    • Claims Agent: Donlin Recano & Company (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Prepetition ABL & DIP ABL Agent: Bank of America NA

      • Legal: Morgan Lewis & Bockius LLP (Julia Frost-Davies, Christopher Carter, Glenn Siegel) & (local) Richards Layton & Finger PA (Mark Collins, Brett Haywood)

    • DIP TL Agent: Cantor Fitzgerald Securities

    • Ad Hoc Term Lender Group (AlbaCore Capital LLP, Courage Credit Opportunities Onshore Fund III LP, Courage Credit Opportunities Fund IV LP, Eaton Vance Management, Deutsche Bank AG Cayman Islands Branch, HG Vora Special Opportunities Master Fund Ltd., Rimrock Capital Management LLC, Neuberger Berman Alternative Funds, Sound Point Capital Management, Whitebox Advisors LLC,

      • Legal: Jones Day (Scott Greenberg, Michael J. Cohen, Nicholas Morin) & (local) Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, Timothy Cairns, Joseph Mulvihill)

      • Financial Advisor: Greenhill & Co., Inc.

    • Crossover Lender: Oaktree Capital Management LP (within its Strategic Credit, High Yield and Loan Strategies)

      • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Alan Kornberg, John Weber) & (local) Cozen O’Connor PC

      • Financial Advisor: Moelis & Co.

    • Supporting Unsecured Noteholder: Solace Capital Partners LP

      • Legal: Fried Frank Harris Shriver & Jacobson LLP (Brad Scheler, Peter Siroka) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott)

      • Financial Advisor: FTI Consulting Inc.

    • Financial Sponsor & Supporting Unsecured Noteholder: Clayton Dubilier & Rice Fund VIII L.P.

    • Supporting Sponsor: Leonard Green & Partners L.P.

      • Legal: Cole Schotz P.C. (Norman Pernick, Kate Stickles)

New Chapter 11 Bankruptcy Filing - Advanced Sports Enterprises Inc.

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Advanced Sports Enterprises Inc.

November 16, 2018

Another day, another retailer in bankruptcy court.

Advanced Sports Enterprises Inc. and several affiliated companies filed for bankruptcy on Friday in the District of North Carolina. The debtors are designers, manufacturers and wholesale sellers of bicycles and related equipment. The debtors utilize both online (www.performancebike.com) and brick-and-mortar channels (104 retail stores across 20 states) to sell their bikes.

The debtors blame their capital structure and the seasonal nature of their business for their fall into bankruptcy. Due to lack of liquidity, it sounds as if the debtors engaged in an operational restructuring that included stretching payables to suppliers and creditors. As you might imagine, once payments are delayed, suppliers and creditors get kind of pissed off and start imposing more aggressive payment terms. In other words, they’re not too keen on being creditors. When that happens, a company pushing the envelope is caught in a vicious cycle. Indeed, here, the debtors say that they are on pace to run out of money in January 2019.

So, the debtors intend to market their business to an array of potential purchasers: private equity funds, family offices, strategic parties, and liquidators. While that process plays out, they will close 40 stores. They seek approval of a $45mm DIP credit facility from their prepetition senior secured lender, Wells Fargo Bank NA, to fund the cases.

  • Jurisdiction: D. of North Carolina

  • Capital Structure: $37.9mm first lien credit facility (Wells Fargo NA). $7.375mm term loan (Advanced Holdings Co., Ltd.). Otherwise, see below.

  • Company Professionals:

    • Legal: Flaster/Greenberg P.C. (William Burnett, Richard Dressel, Harry Giacometti, Douglas Stanger, Damien Nicholas Tancredi) & (local) Northern Blue LLP (John Northen, Vicki Parrott, John Paul H. Cournoyer)

    • Financial Advisor: Clear Thinking Group LLC (Joseph Marchese)

    • Investment Banker: D.A. Davidson & Co. (Michael Smith)

    • Liquidator: Gordon Brothers Retail Partners LLC

    • Real Estate Consultant: A&G Realty Partners LLC

    • Claims Agent: KCC LLC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Senior Secured Lender: Wells Fargo Bank NA

      • Legal: Riemer & Braunstein LLP (Donald Rothman, Steven Fox) & (local) Williams Mullen (Holmes Harden)

    • Unsecured Creditors Committee: none appointed due to lack of creditors.

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Source: First Day Declaration.

Source: First Day Declaration.

New Chapter 11 Filing - Herb Philipson's Army and Navy Stores Inc.

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Herb Philipson’s Army and Navy Stores Inc.

October 8, 2018

Herb Philipson’s Army and Navy Stores Inc., a New York-based outdoor apparel and sporting goods retailer since 1951, filed for bankruptcy in the Northern District of New York.

The company carries various brands like Carhartt, Columbia Sportswear, Levi, lee, Under Armour, Dickies, Timberland and The North Face in its stores (most of which are now the company’s largest unsecured creditors) and also serves as the exclusive retailer for the Utica Comets Hockey Team and the new Utica City Football Club. The company has 9 locations, none of which are in or on company-owned structures or real property. The company had revenues of $43.5mm and $39.8mm in 2016 and 2017, respectively. Through nine months of 2018, the company experienced a dramatic decline in business with revenues of just $15.6mm.

What caused such a stark decline in business? The company notes:

“The decline of the Debtor’s business is directly attributable to a confluence of operational and liquidity factors. Starting in 2015, the Company began to suffer from decreased sales — largely attributable to HP’s inventory mix failing to appeal to the tastes of the market and the rise of e-commerce, which allowed the Debtor’s customers to purchase from on-line retailers the same or similar good being offered by the Company.”

Moreover, the company lost access to its line of credit, necessitating sales of new inventory to finance operations and leaving the company unable to order fresh inventory in Q1 2018.

What followed is a textbook tale of a small brick-and-mortar business trying to make it in a world dominated by upstart DTC brands, Amazon, and bigbox retail. Renegotiations of leases. Headcount reductions. An intensified focus on inventory selection and management. A scramble for new credit which, here, new ownership was able to lock down.

Clearly, however, the terms of the new credit line were either too onerous or too unrealistic as, unfortunately for the company, the new credit facility merely helped expedite the company’s spiral into bankruptcy court. Indeed, roughly a month after entering into the new lending facility, the lender, Second Avenue Capital, notified the company that it was in default under the facility. The relief afforded the company by the cash infusion was, clearly, short-lived.

Consequently, the company filed for bankruptcy so that the “automatic stay” protections of the Bankruptcy Code (section 362) could be leveraged to prevent Second Avenue Capital from exercising its rights and remedies under the credit facility and provide the company with a “breathing spell” within which to attend to “properly restructure and reorganize its affairs and propose a chapter 11 plan that would provide…creditors with meaningful recoveries.”

October 12, 2018 Update:

As is often the case in bankruptcy, there are two sides to every story. In this case, the company’s secured lender, Second Avenue Capital, argues that the company “demonstrated a shocking inability to accurately project the operating performance of the business” leading to “material deviations” to the underwriting-dependent budget. Second Avenue argues, among other things, that (i) the debtor missed its own sales projections by 33.1%, (ii) comparable store sales are projected in the company’s latest budget to be negative 30% and 37% (vs. the underwritten projected positive 5% and 10%) for the months of November and December 2018; and (iii) the company has already missed its own inventory projection by approximately 17.9%. In other words, Second Avenue — while objecting to the company’s motion to use cash collateral — is asserting that they are undercollateralized and that the company is providing inadequate adequate protection.

Notably, Second Avenue doesn’t expressly say that the company was fraudulent in providing the budget upon which Second Avenue underwrote the loan; it does say, however, that “[a]s a consequence of the Debtor’s financial performance…and not any nefarious conduct by the Lender…the Debtor was in substantial and material default” under the credit agreement. Not exactly mincing words. Which only means one of three things: (1) the company was wildly inept in putting together its projections/budget; (2) the company was hopelessly optimistic and otherworldly unrealistic about its projections/budget; (3) the macro conditions for a small brick-and-mortar retailer in today’s day are coming at owners so fast and so furious that projections and budgets, more than usual, are anyone’s guess. We’ll leave it to a court to decide but it sure looks like there may be a contested fight here with the fate of the company in the balance.*

*The first day hearing was scheduled for October 15 but no orders have hit the docket.

  • Jurisdiction: N.D. of New York (Judge Davis)

  • Capital Structure: $2.05mm of secured debt (Second Avenue Capital), $1.5mm secured promissory notes

  • Company Professionals:

    • Legal: Griffin Hamersky LLP (Scott Griffin, Michael Hamersky, Sophia Hepheastou) & Cullen and Dykman LLP (Maureen Bass)

    • Financial Advisor & Investment Banker: Scouler Kirchhein LLC

    • Claims Agent: KCC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Senior Secured Lender: Second Avenue Capital LLC

      • Legal: Riemer & Braunstein LLP (Steven Fox)

🛌New Chapter 11 Bankruptcy Filing - Mattress Firm Inc.🛌

in

Mattress Firm Inc.

10/05/18

Recap: See our recap here.

  • Jurisdiction: D. of Delaware (Judge Sontchi)

  • Capital Structure: See below.

  • Company Professionals:

    • Legal: Sidley Austin LLP (Bojan Guzina, Michael Fishel, Gabriel MacConaill, Matthew Linder, Blair Warner) & (local) Young Conaway Stargatt & Taylor LLP (Edmon Morton)

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Guggenheim Securities LLC (Durc Savini)

    • Liquidator: Gordon Brothers Group LLC

      • Legal: Katten Muchin Rosenman LLP (Steven Reisman, Cindi Giglio) & (local) Saul Ewing Arnstein & Lehr LLP (Mark Minuti, Lucian Murley)

    • Real Estate Advisors: A&G Realty Partners

    • Claims Agent: Epiq Corporate Restructuring LLC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Barclays Bank PLC

      • Legal: Paul Hastings LLP (Andrew Tenzer, Michael Comerford) & (local) Richards Layton & Finger PA (Mark Collins, Jason Madron)

    • Citizens Bank NA

      • Legal: Morgan Lewis & Bockius LLP (Julia Frost-Davies, Marc Leduc, Laura McCarthy) & (local) Richards Layton & Finger PA (Mark Collins, Jason Madron)

    • Steinhoff International Holdings N.V

      • Legal: Linklaters LLP (Robert Trust, Christopher Hunker, Amy Edgy) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Joseph C. Barsalona II)

    • Exit term loan financing backstop group (the “Backstop Group”): Attestor Capital LLP, Baupost Group, Centerbridge Partners LP, DK Capital Management Partners, Farrallon Capital Management L.L.C., KKR & Co. Partners LLP, Monarch Alternative Capital LP, Och-Ziff Capital Management, Silverpoint Capital

      • Legal: Latham & Watkins LLP (Mitchell Seider, Adam Goldberg, Hugh Keenan Murtagh, Marc Zelina, Adam Kassner) & (local) Ashby & Geddes PA (William Bowden, Karen Skomorucha Owens, F. Troupe Mickler IV)

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