Alex and Ani, LLC

CASE SUMMARY: Alex and Ani RSA With Equityholder, Lender Lion Capital Provides for Dual-Track Restructuring, Marketing Process; RSA Would Settle Disputes With Founder

Thu 06/10/2021 16:34 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
Bid Procedures Motion
Cash Collateral Motion
Restructuring Support Agreement
First Day Hearing Agenda


 




















Summary
Alex and Ani is a customizable-jewelry retailer with 74 stores, of which 25 are closed as a result of the Covid-19 pandemic
Attributes the filing to falling revenue in in the wake of operational and supply chain difficulties and significant management turnover, which led to a 2019 out-of-court restructuring, compounded by the Covid-19 pandemic
Entered into RSA with majority shareholder and lender Lion Capital, founder Carolyn Rafaelian and The Bathing Club LLC, which has agreed to purchase some of the company’s debt
RSA provides for a stand-alone restructuring and dual-track marketing process, supported by consensual use of cash collateral


Alex and Ani LLC, an East Greenwich, R.I.-based customizable-jewelry retailer, filed for chapter 11 protection yesterday, Wednesday, June 9, in the Bankruptcy Court for the District of Delaware. The debtors have negotiated an RSA with their majority owner and lender Lion Capital. The RSA provides for a stand-alone restructuring and dual-track marketing process, supported by consensual access to cash collateral. The RSA has been agreed to by 100% of the company’s equity and debt holders. For access to the relevant documents above as well as our First Day by Reorg team's coverage of all U.S. chapter 11 cases filed since 2012 with over $10 million in liabilities including the Alex and Ani chapter 11 filing Request a Trial here.

Click through here for our most recent update on the Alex and Ani chapter 11 situation (subscription required): https://app.reorg.com/v3#/items/intel/14077?item_id=156170

As outlined by Chief Restructuring Officer and interim CEO Robert Trabucco in his first day declaration, after “explosive” growth in the early 2010s gave way to operational and infrastructural growing pains, the company completed an out-of-court restructuring in 2019 to address falling revenue and defaults under its prepetition revolver. The company was further hobbled by the Covid-19 pandemic, and thereafter London-based private equity firm Lion - which became the company’s majority shareholder in connection with the 2019 restructuring - last month acquired all of the debtors’ outstanding first and third lien obligations. Lion also holds a majority of the second lien facility along with a smaller portion held by company founder Carolyn Rafaelian, who has also signed on to the RSA.

The company reports $100 million to $500 million in both assets and liabilities, and its prepetition capital structure includes the following:

The current capital structure results from the 2019 out-of-court restructuring, which subordinated a portion of the pre-existing first lien debt to the new second lien facility, and that portion of the first lien debt became a new “synthetic” third lien credit facility. As noted above, earlier this year, prior holders sold and assigned all obligations under the first and third lien facilities to Lion Capital. Concurrently with the sale and assignment, Wilmington Trust NA was appointed as successor agent to Bank of America under the credit agreements.

The second lien facility is held 65% by Lion and 35% by Carolyn Rafaelian, Alex and Ani’s founder, prior CEO and current minority shareholder. The bankruptcy follows years of internal turmoil at the company and various lawsuits involving Rafaelian. Incorporated into the RSA is a settlement agreement among the debtors, Lion Capital and Rafaelian providing for: (i) Rafaelian’s sale of her 35% interest under the second lien credit facility to The Bathing Club LLC, as purchaser; (ii) Lion Capital’s sale of 35% of the face amount of the first lien obligations to The Bathing Club; (iii) the dismissal and withdrawal of certain outstanding litigation with prejudice; and (iv) mutual releases. As a condition to the settlement, Rafaelian and certain affiliates and The Bathing Club have signed the RSA and agreed to support the restructuring.

The debtors also have $29.1 million of trade debt “and other contingent and unliquidated unsecured obligations related to outstanding litigation.”

The company was wholly owned by Rafaelian until 2012, at which time she sold a 40% interest to San Francisco-based private equity firm JH Partners. JH Partners sold its interest to Lion about two years later. Lion increased its ownership to about 58.75% in connection with the 2019 restructuring. As of the petition date, the equity units of debtor A and A Shareholding Co. LLC, the ultimate parent entity, are held 58.75% by Lion and 41.25% by Rafaelian.

The debtors have filed a motion to approve bid procedures. There is currently no stalking horse, but the procedures include protections in the event one is selected. The proposed bid procedures contemplate a 60-day marketing process to “complement” the RSA.

Another key component of the proposed restructuring is the rejection of unprofitable leases to rebalance the company’s lease portfolio. “The key to achieving the restructuring is speed and cooperation,” the debtors say, adding that “in an ever-shifting retail landscape that has seen dozens of casualties in recent years, Alex and Ani will work collaboratively with all parties in interest to ensure that it remains a going concern for many years to come.” The debtors’ prepetition analysis of their existing store footprint determined that it was advisable to permanently close 37 stores (out of 74 current total leases).

The first day hearing is scheduled for tomorrow, Friday, June 9, at 11:30 a.m. ET.

The debtors are represented by Kirkland & Ellis and Klehr Harrison Harvey Branzburg as bankruptcy counsel. The debtors are also working with Portage Point Partners as financial advisor and investment banker. Robert Trabucco is the CRO. KCC is the claims agent. The case has been assigned to Judge Craig T. Goldblatt (case No. 21-10918).

The RSA, which mainly includes only placeholder terms at this juncture, lists the following milestones:


 
Background / Prepetition Restructuring Efforts

Alex and Ani was founded by Carolyn Rafaelian in 2004 as a small jewelry company selling wire charm bracelets and manufacturing jewelry for private labels. According to the debtors, the brand’s jewelry “was soon known as a symbol of spiritual well-being and empowerment.” In less than a decade, the company increased the number of bracelets sold to nearly 10 million a year, expanded to over 1,000 employees from less than two dozen, partnered with national department stores to carry the Alex and Ani line, and opened more than 100 retail stores. The debtors attribute their “explosive growth in the early 2010s” to their “dedicated customer base, expansive offerings through partnership with brand-loyal followings, and the stackability of its patented wire bracelets.” The debtors have 524 employees.

The company states that two “major declines” precipitated the bankruptcy case: (i) the significant drop in revenue that necessitated the 2019 restructuring, with revenue falling from its peak of $340 million in 2015 to $224 million in 2018 due to operational difficulties, including surplus inventory, burdensome long-term leases, and setbacks with fulfilling wholesale orders, all of which were exacerbated by “significant management turnover” stemming from “tensions within the Company”; and (ii) the onset of the Covid-19 pandemic only six months after consummation of the 2019 restructuring, which escalated many already existing struggles facing brick-and-mortar retailers.

With respect to management turnover, former CEO Giovanni Feroce left the company at Rafalian’s request in 2014. This departure was quickly followed by the “voluntary or requested” departure of the debtors’ CFO, chief technical officer, chief strategy officer, chief digital officer, acting COO, assistant general counsel, and vice president of transitional operations, retail and wholesale. Feroce was succeeded briefly as president by former Yankee Candle CEO Harlan Kent while Rafaelian took the helm as CEO. Kent’s employment lasted less than a year, and ultimately, Rafaelian assumed the role of president and CEO until the 2019 restructuring.

In December 2018, Bank of America declared a default under the first lien agreement, accelerated the obligations after a violation of the net leverage ratio covenant and suspended the debtors’ access to the revolver. In response, Rafaelian authorized the company to file a lawsuit against BofA in July 2019 alleging breach of contract, tortious interference and gender discrimination. To circumvent a bankruptcy filing due to the acceleration of debt obligations, Lion Capital, then a minority shareholder, engaged with Bank of America and Rafaelian regarding the terms of a restructuring that would waive the outstanding defaults and provide additional working capital for the debtors. The parties agreed to a series of transactions, including (i) the $20 million second lien facility, $13 million of which was provided by Lion Capital and $7 million of which was provided by A&A Pledge Co. (an entity owned by Rafaelian); (ii) an amendment of the first lien credit agreement to (a) allow for the incurrence of the second lien facility, (b) subordinate $76.3 million of first lien term loans to the second lien facility and (c) waive all outstanding defaults; (iii) dismissal with prejudice of the BofA lawsuit; (iv) the resignation of Rafaelian as CEO and the appointment of Trabucco as CRO and interim CEO; and (v) the adjustment of Rafaelian’s (through Alex and Ani Pledge Co., an entity owned by Rafaelian) and Lion Capital’s respective equity interest in A and A Shareholding, the ultimate debtor parent entity, from about 60% and 40% to about 40% and 60%.

The company also became a victim of the ransomware virus known as “Ryuk” in February 2020, which caused “significant disruption of the Company’s operations for several months.” When the pandemic hit, the company was forced to close all stores.

Lion and Rafaelian were tied up in various litigation stemming from a $5 million promissory note, which Rafaelian personally borrowed in April 2020 from Lion Capital to fund a portion of her commitments under the second lien facility. On Oct. 28, 2020, the New York Supreme Court ordered Rafaelian to repay Lion Capital the $5 million lent under the note, along with interest and attorneys’ fees. Rafaelian made that payment but filed an appeal, which remains pending as of the petition date.

The company leases all of its store locations and offices, including its combined headquarters and distribution center in East Greenwich, R.I. The company is party to about 74 leases for stores across the United States, Canada and Puerto Rico, with 24 currently closed due to Covid-19 and another 12 slated to be closed under the debtors’ lease analysis.

The company has also partnered with many national department stores, such as Neiman Marcus, Bloomingdale’s, Nordstrom, Nordstrom Rack and Dillard’s, and more than 300 small independent retailers to display and sell its branded jewelry line. Sales to its authorized retail partners, which are at wholesale prices, accounted for about 43% of the company’s total consolidated sales in 2019, which was its last full fiscal year operating all stores. Alex and Ani has maintained a “robust and interactive” online presence over the past several years. About 45% of the company’s sales originate through e-commerce.

The company’s corporate organizational structure is as follows:

The debtors' largest unsecured creditors are listed below:












































































10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
Chapel Associates II LLC Johnston, R.I. Rent $   4,126,608
Simon Property Group Inc. Indianapolis Rent 3,949,190
Brookfield Properties Retail Inc. Chicago Rent 3,314,166
Quality Spray Technologies Inc. Providence, R.I. Trade 3,256,458
Macerich Oaks LP Santa Monica, Calif. Rent 2,107,887
Westfield LLC Los Angeles Rent 753,578
National Chain Co. Warwick, R.I. Trade 544,518
Irvine Realty Co. Newport Beach, Calif. Rent 467,197
The Forbes Co. Southfield, Mich. Rent 465,758
VNO 155 Spring Street LLC Paramus, N.J. Rent 459,955

The case representatives are as follows:






























































































Case Representatives
Role Name Firm Location
Debtors' Co-Counsel Joshua A. Sussberg Kirkland & Ellis New York
Allyson B. Smith
Alexandra Schwarzman Chicago
Debtors' Co-Counsel Domenic E. Pacitti Klehr Harrison
Harvey Branzburg		 Wilmington, Del.
Michael W. Yurkewicz
Sally E. Veghte
Morton R. Branzburg Philadelphia
Debtors' Financial
Advisor and
Investment Banker		 Ryan Mersch Portage Point
Partners		 Chicago
Matthew Ray
Debtors' Claims
Agent		 Evan Gershbein Kurtzman Carson
Consultants		 El Segundo, Calif.
Co-Counsel to
Wilmington Trust NA		 David Wender Alston & Bird Atlanta
Co-Counsel to
Lion Capital		 Paul M. Basta Paul Weiss Rifkind
Wharton & Garrison		 New York
Elizabeth R. McColm
Brian Bolin
Grace Hotz
Co-Counsel to
Lion Capital and
Wilmington Trust NA		 Pauline K. Morgan Young Conaway
Stargatt & Taylor		 Wilmington, Del.
Sean Greecher
U.S. Trustee David Buchbinder Office of the U.S.
Trustee		 Wilmington, Del.

Restructuring Support Agreement

Prior to filing, the company, consenting sponsor LC A&A Holdings Inc. and LC A&A Intermediate Investors LLC, consenting founder Carolyn Rafaelian and her affiliated entities as well as debt purchaser The Bathing Club LLC entered into a restructuring support agreement, which proposes two different paths: (i) the sale of all or substantially all of the restructured equity or assets or (ii) a stand--alone reorganization. Both of these paths would be effectuated through a plan.

The RSA provides the following plan structure of the various classes:


The sale proceeds recovery is defined as “[f]or a given Class of Claims, the amount of Sale Proceeds available following satisfaction in full of senior Classes of Claims; provided that such amount shall not exceed the amount required for such Class of Claims to be satisfied in full.”

If a stand-alone restructuring is pursued, the reorganized company would issue, on the effective date, a single class of common equity interests, to be distributed pursuant to the RSA.

The consenting sponsor would have the right to credit bid all or any portion of the first, second and third lien credit facility claims in connection with a sale transaction.

If a sale transaction is consummated, any executory contracts and unexpired leases would be deemed rejected as of entry of the confirmation order, unless such contract or lease: (i) is assumed by the debtors and assigned to a purchaser; (ii) was previously rejected by the debtors by final order; (iii) was previously expired or terminated; (iv) is the subject of a debtors’ motion to reject on or before the date of entry of the confirmation order; or (v) is specifically designated as a contract or lease to be rejected.

If a stand-alone restructuring is consummated, then as of the effective date and payment of any cure amounts, all executory contracts and unexpired leases would be deemed assumed, unless such contract or lease: (i) was previously assumed or rejected; (ii) previously expired or terminated; (iii) is the subject of a motion to reject; (iv) contains a change of control or similar provision that would be triggered by the restructuring; or (v) is specifically designated as a contract or lease to be rejected.

In either case, claims arising from the rejection of the debtors’ executory contracts and unexpired leases would be classified as general unsecured claims.

The plan would provide for debtors’ releases to the following released parties: (i) each debtor; (ii) each reorganized debtor; (iii) each company party; (iv) the debtors’ current and former directors and officers; (v) each agent; (vi) the consenting stakeholders (vii) all holders of interest; and (viii) their professionals. The RSA also contemplates releases from holders of claims and interests, with each debtor, each reorganized debtor, each company party, each agent, the consenting stakeholders, all holders of claims and interests and their professionals providing releases to the same debtors’ released parties. If an entity elects to opt out of the releases or timely files an objection to the releases that is not resolved before confirmation, that entity would not be considered a released or releasing party.

The RSA provides an exculpation provision for the debtors, the reorganized debtors, the consenting stakeholder and the agents, along with their professionals.

Bid Procedures Motion

The debtors seek to establish bidding procedures for the sale of substantially all of their assets, with the support of the consenting sponsor. The debtors assert that the proposed procedures provide for “substantial flexibility” in the structure of any transaction, including the debtors being able to select a stalking horse bidder.

The procedures contemplate that secured creditors would have the right to credit bid, provided that: (i) a secured creditor shall have the right to credit bid its claim only with respect to the collateral by which the creditor is secured and (ii) any credit bid by a junior secured creditor contain a cash component sufficient to repay secured claims of a senior secured creditor.

To achieve a value-maximizing transaction, the debtors’ financial advisor, Portage Point Partners, began a marketing process on the petition date, with the debtors providing a list of approximately 165 parties that may be interested in the sale and which have the “financial resources” to consummate a sale. The debtors say they plan to distribute a “teaser” to certain contact parties and expect to execute confidentiality agreements in the coming days.

The debtors seek authorization to select one or more bidders to act as stalking horse bidders. As bid protections, in connection with any stalking horse agreement, the debtors propose a breakup fee of up to 3% of the purchase price and/or an expense reimbursement of up to $250,000.

The proposed bid requirements include a good-faith deposit of 10% of the cash consideration of any bid.

The debtors propose the following sale timeline:

Cash Collateral Motion

The debtors are seeking authority to use the cash collateral of their prepetition secured lenders as part of the RSA. Emphasizing an “immediate postpetition need” to use cash collateral, the debtors say that they would not be able to maintain the value of the estates during the cases without access to the cash collateral.

The debtors would be permitted to use cash collateral to: (i) finance working capital needs and general corporate purposes; (ii) pay related transaction costs, fees, liabilities and expenses (including all professional fees and expenses) and other administration costs incurred in connection with the chapter 11 cases (including the adequate protection payments); and (iii) pay any prepetition obligations authorized to be paid pursuant to any first day orders.

The company proposes the following adequate protection to its prepetition lenders: replacement liens, allowed superpriority administrative expense claims, financial reporting requirements, payment of the professionals’ fees and expenses, certain other adequate protection payments and access to records. Subject to entry of a final order, the adequate protection liens would attach to any proceeds of or property recovered in connection with any avoidance actions.

All obligations owing to the prepetition secured parties with respect to the first lien obligations, including accrued but unpaid interest, would continue to accrue interest at a default rate applicable on the petition date and would be payable in kind.

In addition, upon entry of a final order, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).

The carve-out for professional fees is $650,000.

The challenge period would expire 60 days after the petition date, absent any written agreement. If an official committee of unsecured creditors is appointed, up to $50,000 of cash collateral may be used to pay the allowed fees and expenses of the UCC in investigating (but not commencing or prosecuting) the validity, enforceability, perfection, priority or extent of the liens under the prepetition credit documents.

Subject to the challenge period, the proposed interim order provides a release of the prepetition secured parties.

The proposed budget for the use of cash collateral is HERE.

Other Motions

The debtors also filed various standard first day motions, including the following:

  • Motion for joint administration

    • The cases will be jointly administered under case No. 21-10918.



  • Motion to pay critical vendors

    • On an interim basis, the debtors seek to pay up to $2.9 million on account of shipping/warehousing charges (up to $350,000), critical vendor claims (up to $1.6 million) and 503(b)(9) claims (up to $950,000). On a final basis, the debtors seek to pay up to $5.2 million on account of shipping/warehousing charges (up to $350,000), critical vendor claims (up to $3.9 million) and 503(b)(9) claims (up to $950,000).



  • Motion to pay employee wages and benefits

    • The company seeks to pay employee obligations as follows:





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