Ascena Retail Group
CASE SUMMARY: Ascena Retail Enters Chapter 11 With RSA Supported by 68% of Term Loan Claims, $150M New-Money DIP; Reorganized Equity to Term Lenders, DIP Funding Parties
Thu 07/23/2020 13:19 PM
Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
8-K
This morning Ascena Retail Group Inc., owner of nationwide mall brands Ann Taylor, LOFT, Lou & Grey, Lane Bryant, Cacique, Catherines and Justice, and its affiliates filed chapter 11 petitions in the U.S. Bankruptcy Court for the Eastern District of Virginia. The debtors entered into a restructuring support agreement with lenders holding 68% of their $1.6 billion secured term loan facility and have obtained a commitment for $311.8 million in DIP financing, including $150 million in new money backstopped by certain of the supporting lenders and up to $161.8 million of rolled up prepetition loans.
The RSA contemplates $75 million of the new-money portion of the DIP would be provided by certain of the supporting lenders, with the remaining $75 million to be open to all term lenders (and backstopped by the supporting lenders). Lenders who participate in the DIP term loan would have up to $161.8 million of their prepetition loans rolled up into the DIP and would receive their pro rata share of 44.9% of the reorganized equity. In addition, all term lenders would receive their share of 55.1% of reorganized equity and $88.2 million of new second-out term loans. ABL lenders holding approximately $333 million under a $500 million facility would be paid in full, including a $50 million paydown from the new-money DIP. According to the first day declaration, the debtors are in discussions with the ABL lenders regarding an additional $400 million in financing, which would be provided either as a DIP ABL that would roll into an exit facility or at emergence.
The debtors’ prepetition capital structure chart is below:
Additional components of the RSA, according to the first day declaration of Carrie W. Teffner, interim executive chair of the board of directors, are as follows:
The debtors intend to use the bankruptcy to reduce store count to about 1,200 from about 2,800, depending on landlord rent concessions. The debtors have also agreed to sell the IP of Catherines to City Chic Collective Ltd., which would transition the Catherines brand into an e-commerce subsidiary. The debtors’ Justice brand will transition to a wholly online operation.
The case has been assigned to Judge Kevin Huennekens, and the debtors will be jointly administered under case No. 20-33113. The debtors are represented by Kirkland & Ellis and Cooley and have retained Alvarez & Marsal as restructuring advisor and Guggenheim Partners as investment banker. The debtors have retained SB360 to conduct certain store closing sales at all closing Catherines and Justice stores and select premium brand closing stores. Prime Clerk is the claims agent. The debtors are also working with Malfitano Advisors to assist in the determination of which of the debtors’ store locations should be closed and related asset disposition matters, and have hired A&G Realty Partners to assist with the ongoing lease negotiation.
The debtors have filed a motion for an expedited first day hearing today, Thursday, July 23, at 2 p.m. ET.
Background
According to the Teffner declaration, the company “is a leading specialty retailer for women and girls” that traces its roots to the Dressbarn chain, which was founded in 1962. The debtors operate about 2,800 stores in the United States, Canada and Puerto Rico and have about 40,000 employees. As of the petition date, the debtors have approximately $1.6 billion in funded debt obligations, including approximately $330 million outstanding under a $500 million ABL and approximately $1.27 billion in senior secured term loan obligations traceable to the $2.16 billion acquisition of Ann Taylor, LOFT and Lou & Grey in 2015. According to Teffner, in 2018 the company made repayments on the term loan totaling $225 million, of which $180 million “was applied to future quarterly scheduled payments, extending the next required quarterly payment of $22.5 million to November 2020.”
The debtors attribute the filing to the effects of the Covid-19 pandemic, which were exacerbated by their “already highly leveraged balance sheet” and the “macro-economic challenges of the brick and mortar retail industry,” which include “a permanent shift towards a more online-centric format” for fashion retailers. Teffner says that as of the petition date, “substantially all” stores have reopened, but “[c]ertain states have implemented or indicated they are considering social distancing measures that may require that Ascena re-close certain of its stores,” and “it is unclear when store traffic will return to pre-COVID-19 levels.”
“Over the past several years,” Teffner says, the company “has been proactive in developing structural and strategic transformations to refine the Company’s operating model to center on key customer segments, implement initiatives designed to optimize product flow through the Company’s distribution channels, and to optimize its store fleet by reducing the number of underperforming stores and obtaining rent relief,” realizing “significant costs savings.”
At the time of the Ann Taylor acquisition in 2015, Teffner says, the debtors operated more than 4,900 stores. This number has been ”significantly reduced in the following years as part of the Company’s rationalization efforts.” Specifically, the debtors liquidated the Dressbarn brand between May 2019 and the second quarter of 2020, closing about 660 stores and selling e-commerce rights for approximately $5 million.
Nevertheless, Teffner says, the debtors still required a “long-term strategic solution.” Accordingly, a special committee of the board began reviewing strategic options in fall 2019, and discussions with an ad hoc group of term lenders accelerated over the past several months, resulting in the RSA. Teffner says that the debtors remain in discussions with their ABL lenders regarding a $400 million ABL exit facility, “which may be made available as part of a debtor-in-possession financing facility that would automatically convert to a $400 million ABL Exit Facility” upon or ahead of emergence.
According to cleansing materials released this morning, the debtors expect store revenue to decline 36% in fiscal 2020, offset by a 5% increase in e-commerce sales. EBITDA is expected to be negative $295 million on revenue of $3.6 billion and a gross margin of 49.3% in fiscal 2020, with EBITDA improving modestly in fiscal 2021 to negative $227 million, before turning positive in fiscal 2022 to $270 million on $2.9 billion in revenue and a 56.8% gross margin rate. The debtors say they have extended vendor terms to 60 to 90 days, stopped paying rent and engaged A&G to negotiate rent reductions.
The debtors indicate that their strategic plan is built on three core brands - LOFT, Ann Taylor and Lane Bryant - with Justice and Catherines considered noncore. Teffner indicates that LOFT and Ann Taylor combined for approximately $2.452 billion in sales in 2019, with Lane Bryant and Catherines adding approximately $969 million. The remaining stores accounted for approximately 23% of gross sales, Teffner says. “Ascena intends to wind down the brick-and mortar operations of Catherines, and Lou & Grey, and restructure Justice, including winding down the majority, or all, of the brick and mortar operations,” Teffner says.
Select financials and projections are shown below. As of the petition date, the debtors estimate that they have approximately $433.7 million of cash on hand.
The company’s organizational structure is as follows:
The debtors' largest unsecured creditors are listed below:
Restructuring Support Agreement
The RSA contemplates a debt-for-equity swap by which term lenders would hold substantially all of the debtors’ reorganized equity, subject to dilution. Under the restructuring term sheet attached to the RSA, ABL obligations will be either paid in full upon emergence or refinanced by an exit ABL facility provided by the ABL lenders.
Distributions to term loan lenders would depend on whether they participate in the $150 million DIP term loans. Term loan lenders that participate in the DIP would receive a participation in the first-out exit term facility plus “cash on account of accrued and unpaid interest and other charges payable through the Plan Effective Date.” All term loan lenders (including DIP and non-DIP lenders) would receive a participation in $88.2 million of last-out exit term loans and 55.1% of reorganized equity (less the shares distributed on account of the $7.5 million backstop premium), subject to dilution on account of a management incentive plan. Term lenders that participate would receive the other 44.9% of reorganized equity, subject to dilution by the MIP. If the plan is not confirmed and consummated, the DIP and backstop premium would be payable in cash.
General unsecured creditors would share $500,000 if they vote to accept the plan. If they vote to reject, they would receive the minimum treatment required to confirm the plan.
Under the RSA, the new board of the reorganized debtors would consist of:
Up to 10% of reorganized equity would be reserved for a management incentive plan.
The RSA also includes a term sheet for the $311.8 million first-out term exit facility and $88.2 million second-out term exit facility. Under the term sheet, these exit facilities would be secured by a lien on substantially all of the debtors’ assets. According to the term sheet, the “Definitive Documentation” shall “contain a ‘Momentive’ provision satisfactory to the Required Consenting Stakeholders.” Terms of the exit facilities are described below.
The exit term facility term sheet includes as a condition precedent that “with respect to store leases which are not rejected” the debtors must obtain “aggregate annual cost savings for FY2020 of at least $18 million.” Further, the term sheet provides that, with respect to the debtors’ premium segment and Lane Bryant (for example, the core brands), “the number of store closures that shall have occurred prior to the Effective Date shall be consistent with the closures anticipated under the Company’s business plan provided to the Ad Hoc Committee Advisors (as determined by the Ad Hoc Committee Advisors in their reasonable discretion) or as otherwise consented to by the Required Consenting Stakeholders.”
The RSA contemplates typical third-party release and exculpation provisions in favor of the debtors, prepetition lenders, agents and their respective representatives. In addition, on the execution date of the RSA, all of the previously unencumbered equity held by the loan parties in the LuxCo entities will be pledged as collateral for the DIP.
The RSA includes the following milestones:
DIP Financing Motion
The up to $311.8 million DIP would include up to $161.8 million of “rolled-up” prepetition loans and $150 million in new money funded half by the backstop group and the other half open to all prepetition term lenders. The proceeds of the new-money DIP loans may be used, among other things, to pay certain costs, fees and expenses and to prepay or repay up to $50 million of borrowings under the ABL credit agreement.
The DIP loan would mature in six months and pay a coupon of L+1,175 basis points with a 1% LIBOR floor. Additionally, lenders would receive a 2.5% commitment fee on the new-money portion. Backstop parties would receive $7.5 million in cash.
Collateral for the DIP would include a first priority lien on all collateral securing the term loan claims and all unencumbered assets (excluding any assets that qualify as ABL priority collateral, which shall be subject to a second priority lien), including, for the avoidance of doubt, a first priority interest in the funding account for the DIP term facility and 100% of the equity interests in the LuxCo entities.
The DIP term facility will convert on a dollar-for-dollar basis into first-out term loans as discussed below. If, after the DIP term facility has been funded and if the conversion does not occur, the DIP term loans would be repaid in cash on their stated maturity. In addition, in such a scenario, or upon the debtors selling all or substantially all of their assets, the company would pay the DIP term loan lenders a cash premium equal to 11.23%.
Adequate Protection
The company proposes as adequate protection for ABL lenders cash interest at the non-default rate according to the credit agreement in addition to certain superpriority claims and replacement liens. The debtors shall not allow the availability of the ABL to fall below 10% of the credit agreement amount, or $40 million. If the debtors fail to comply with the minimum availability, the debtors would be required to deposit cash into a controlled cash reserve account maintained by the ABL agent or pay down the ABL obligations to restore compliance. In addition to receiving adequate protection liens, term lenders would receive the reasonable and documented costs and out-of-pocket fees for professionals.
The carve-out for professional fees is $5 million.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
According to the motion, failing to obtain a final order on terms reasonably acceptable to the prepetition agents on or before 35 days after the petition date would constitute a cash collateral termination event.
Exit Facilities
Teffner’s declaration includes term sheets for the first-out and second-out exit term loans. The first-out exit term loan would total $311.8 million after the conversion from the DIP. The second-out term loan, distributed to prepetition lenders, would total $88.2 million. The first-out exit loan would mature in four years following the effective date and pay L+11.75%. The second out loan would mature in five years and pay L+11%, with 8.5% of the interest paid in kind until the second anniversary of the loan. In addition, the first-out loans would amortize at 1% per year through the second anniversary and 3% thereafter. The second-out loans would amortize at 1% per year for the life of the loan.
The loans would be guaranteed jointly and severally on a senior basis by the direct parent of the borrower and each existing and subsequently acquired or organized direct or indirect material domestic subsidiary, material foreign subsidiary and (x) each Luxembourg subsidiary, (y) each guarantor party to the prepetition term loan credit agreement and (z) each subsidiary owning material intellectual property. Material subsidiaries would represent those that generate at least 2.5% of total company EBITDA.
Operational Restructuring Motions
The debtors have filed a number of motions to address operational matters including store closing sales and rejection of executory contracts and unexpired leases. Overall, the debtors anticipate closing at least approximately 1,100 store locations, disclosed in an exhibit to their store closing motion. The debtors may need to close additional stores “to the extent lease negotiations are unsuccessful,” the motion notes. Relatedly, the debtors have filed a motion to reject the leases for their previously closed and closing stores.
The store closing motion seeks approval to assume a July 22 consulting agreement with SB360 Capital Partners which would entitle SB360 to a consulting fee of 0.95% of gross proceeds plus 15% of gross sales of FF&E, “net only of sales tax.” SB360 would conduct store closing sales at all closing Catherines and Justice stores and select premium brand closing stores in Canada, Puerto Rico and Hawaii. Malfitano Advisors would separately close certain premium brand stores in the U.S.
The debtors filed a rejection procedures motion to address executory contracts and unexpired leases generally. Separately, the debtors filed a motion to reject franchise agreements for the Justice and LOFT brands with foreign franchisees.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
8-K
This morning Ascena Retail Group Inc., owner of nationwide mall brands Ann Taylor, LOFT, Lou & Grey, Lane Bryant, Cacique, Catherines and Justice, and its affiliates filed chapter 11 petitions in the U.S. Bankruptcy Court for the Eastern District of Virginia. The debtors entered into a restructuring support agreement with lenders holding 68% of their $1.6 billion secured term loan facility and have obtained a commitment for $311.8 million in DIP financing, including $150 million in new money backstopped by certain of the supporting lenders and up to $161.8 million of rolled up prepetition loans.
The RSA contemplates $75 million of the new-money portion of the DIP would be provided by certain of the supporting lenders, with the remaining $75 million to be open to all term lenders (and backstopped by the supporting lenders). Lenders who participate in the DIP term loan would have up to $161.8 million of their prepetition loans rolled up into the DIP and would receive their pro rata share of 44.9% of the reorganized equity. In addition, all term lenders would receive their share of 55.1% of reorganized equity and $88.2 million of new second-out term loans. ABL lenders holding approximately $333 million under a $500 million facility would be paid in full, including a $50 million paydown from the new-money DIP. According to the first day declaration, the debtors are in discussions with the ABL lenders regarding an additional $400 million in financing, which would be provided either as a DIP ABL that would roll into an exit facility or at emergence.
The debtors’ prepetition capital structure chart is below:
Additional components of the RSA, according to the first day declaration of Carrie W. Teffner, interim executive chair of the board of directors, are as follows:
- ABL loans would be paid in full or refinanced by a $400 million exit ABL under discussion with ABL lenders;
- All term lenders will have the opportunity to participate in $75 million in interim DIP financing, and a group of backstop term lenders would provide the remainder of the DIP upon final approval in exchange for a $7.5 million backstop premium payable in reorganized equity;
- All term lenders that participate in the new-money DIP would have $161.8 million of their loans rolled up;
- DIP term lenders would receive 44.9% of reorganized equity (subject to dilution by a management incentive plan of up to 10% of reorganized equity), and the DIP would be converted to a new first-out term loan facility upon emergence;
- All term lenders would also share 55.1% of reorganized equity (minus backstop premium shares and subject to dilution by the MIP) and participate in $88.2 million in new second-out term loans; and
- Holders of general unsecured claims would share $500,000 if they vote to accept the plan.
The debtors intend to use the bankruptcy to reduce store count to about 1,200 from about 2,800, depending on landlord rent concessions. The debtors have also agreed to sell the IP of Catherines to City Chic Collective Ltd., which would transition the Catherines brand into an e-commerce subsidiary. The debtors’ Justice brand will transition to a wholly online operation.
The case has been assigned to Judge Kevin Huennekens, and the debtors will be jointly administered under case No. 20-33113. The debtors are represented by Kirkland & Ellis and Cooley and have retained Alvarez & Marsal as restructuring advisor and Guggenheim Partners as investment banker. The debtors have retained SB360 to conduct certain store closing sales at all closing Catherines and Justice stores and select premium brand closing stores. Prime Clerk is the claims agent. The debtors are also working with Malfitano Advisors to assist in the determination of which of the debtors’ store locations should be closed and related asset disposition matters, and have hired A&G Realty Partners to assist with the ongoing lease negotiation.
The debtors have filed a motion for an expedited first day hearing today, Thursday, July 23, at 2 p.m. ET.
Background
According to the Teffner declaration, the company “is a leading specialty retailer for women and girls” that traces its roots to the Dressbarn chain, which was founded in 1962. The debtors operate about 2,800 stores in the United States, Canada and Puerto Rico and have about 40,000 employees. As of the petition date, the debtors have approximately $1.6 billion in funded debt obligations, including approximately $330 million outstanding under a $500 million ABL and approximately $1.27 billion in senior secured term loan obligations traceable to the $2.16 billion acquisition of Ann Taylor, LOFT and Lou & Grey in 2015. According to Teffner, in 2018 the company made repayments on the term loan totaling $225 million, of which $180 million “was applied to future quarterly scheduled payments, extending the next required quarterly payment of $22.5 million to November 2020.”
The debtors attribute the filing to the effects of the Covid-19 pandemic, which were exacerbated by their “already highly leveraged balance sheet” and the “macro-economic challenges of the brick and mortar retail industry,” which include “a permanent shift towards a more online-centric format” for fashion retailers. Teffner says that as of the petition date, “substantially all” stores have reopened, but “[c]ertain states have implemented or indicated they are considering social distancing measures that may require that Ascena re-close certain of its stores,” and “it is unclear when store traffic will return to pre-COVID-19 levels.”
“Over the past several years,” Teffner says, the company “has been proactive in developing structural and strategic transformations to refine the Company’s operating model to center on key customer segments, implement initiatives designed to optimize product flow through the Company’s distribution channels, and to optimize its store fleet by reducing the number of underperforming stores and obtaining rent relief,” realizing “significant costs savings.”
At the time of the Ann Taylor acquisition in 2015, Teffner says, the debtors operated more than 4,900 stores. This number has been ”significantly reduced in the following years as part of the Company’s rationalization efforts.” Specifically, the debtors liquidated the Dressbarn brand between May 2019 and the second quarter of 2020, closing about 660 stores and selling e-commerce rights for approximately $5 million.
Nevertheless, Teffner says, the debtors still required a “long-term strategic solution.” Accordingly, a special committee of the board began reviewing strategic options in fall 2019, and discussions with an ad hoc group of term lenders accelerated over the past several months, resulting in the RSA. Teffner says that the debtors remain in discussions with their ABL lenders regarding a $400 million ABL exit facility, “which may be made available as part of a debtor-in-possession financing facility that would automatically convert to a $400 million ABL Exit Facility” upon or ahead of emergence.
According to cleansing materials released this morning, the debtors expect store revenue to decline 36% in fiscal 2020, offset by a 5% increase in e-commerce sales. EBITDA is expected to be negative $295 million on revenue of $3.6 billion and a gross margin of 49.3% in fiscal 2020, with EBITDA improving modestly in fiscal 2021 to negative $227 million, before turning positive in fiscal 2022 to $270 million on $2.9 billion in revenue and a 56.8% gross margin rate. The debtors say they have extended vendor terms to 60 to 90 days, stopped paying rent and engaged A&G to negotiate rent reductions.
The debtors indicate that their strategic plan is built on three core brands - LOFT, Ann Taylor and Lane Bryant - with Justice and Catherines considered noncore. Teffner indicates that LOFT and Ann Taylor combined for approximately $2.452 billion in sales in 2019, with Lane Bryant and Catherines adding approximately $969 million. The remaining stores accounted for approximately 23% of gross sales, Teffner says. “Ascena intends to wind down the brick-and mortar operations of Catherines, and Lou & Grey, and restructure Justice, including winding down the majority, or all, of the brick and mortar operations,” Teffner says.
Select financials and projections are shown below. As of the petition date, the debtors estimate that they have approximately $433.7 million of cash on hand.
The company’s organizational structure is as follows:
(Click HERE to enlarge.)
The debtors' largest unsecured creditors are listed below:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Claim Amount |
|---|---|---|---|
| Simon Property Group | Indianapolis | Trade | $ 31,665,060 |
| Brookfield Properties | New York | Trade | 16,619,835 |
| Boston Properties LP | Boston | Trade | 8,809,477 |
| Tanger Properties LP | Greensboro, N.C. | Trade | 7,228,481 |
| Pan Pacific Co. Ltd. | Seoul | Trade | 6,831,314 |
| MGF Sourcing | Columbus, Ohio | Trade | 6,726,982 |
| SAE A Trading Co. Ltd. | Seoul | Trade | 6,347,041 |
| Orient Craft | Gurgaon, India | Trade | 5,309,190 |
| The Macerich Co. | Santa Monica, Calif. | Trade | 5,252,749 |
| HIP Sing China Industrial
Ltd. |
Hong Kong | Trade | 5,075,819 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel | Edward O. Sassower | Kirkland
& Ellis |
New York |
| Steven N. Serajeddini | |||
| John R. Luze | Chicago | ||
| Debtors' Co-Counsel | Cullen D. Speckhart | Cooley | Washington |
| Olya Antle | |||
| Debtors' Restructuring
Advisor |
N/A | Alvarez &
Marsal |
N/A |
| Debtors' Investment
Banker |
N/A | Guggenheim
Partners |
N/A |
| Debtors' Store Closing
Sales Consultant |
Aaron Miller | SB360
Capital Partners |
New York |
| Debtors' Lease
Negotiation Consultant |
N/A | A&G
Realty |
N/A |
| Debtors' Store
Closing Advisor |
Joseph Malfitano | Malfitano
Advisors |
Boulder, Colo. |
| Co-Counsel to the
ABL Agent |
Julia Frost-Davies | Morgan,
Lewis & Bockius |
Boston |
| Christopher L. Carter | |||
| Co-Counsel to the
ABL Agent |
Tyler P. Brown | Hunton
Andrews Kurth |
Richmond, Va. |
| Justin F. Paget | |||
| Jennifer E. Wuebker | |||
| Financial Advisor for
the ABL Agent |
N/A | Berkeley
Research Group |
N/A |
| Co-Counsel to the
Ad Hoc Term Loan Group |
Dennis F. Dunne | Milbank | New York |
| Evan R. Fleck | |||
| Abigail L. Debold | |||
| Co-Counsel to the
Ad Hoc Term Loan Group |
Corey S. Booker | Whiteford,
Taylor & Preston |
Richmond, Va. |
| Vernon E. Inge Jr. | |||
| Christopher A. Jones | |||
| Financial Advisor for
the Ad Hoc Term Loan Group |
N/A | Greenhill
& Co. |
N/A |
| Co-Counsel to the
Term Loan Agent |
N/A | Latham
& Watkins |
N/A |
| Co-Counsel to the
Term Loan Agent |
N/A | Holland
and Knight |
N/A |
| Counsel to SB360
Capital Partners |
Thomas J. McKee Jr. | Greenberg
Traurig |
McLean, Va. |
| Debtors' Claims Agent | Benjamin J. Steele | Prime Clerk | New York |
Restructuring Support Agreement
The RSA contemplates a debt-for-equity swap by which term lenders would hold substantially all of the debtors’ reorganized equity, subject to dilution. Under the restructuring term sheet attached to the RSA, ABL obligations will be either paid in full upon emergence or refinanced by an exit ABL facility provided by the ABL lenders.
Distributions to term loan lenders would depend on whether they participate in the $150 million DIP term loans. Term loan lenders that participate in the DIP would receive a participation in the first-out exit term facility plus “cash on account of accrued and unpaid interest and other charges payable through the Plan Effective Date.” All term loan lenders (including DIP and non-DIP lenders) would receive a participation in $88.2 million of last-out exit term loans and 55.1% of reorganized equity (less the shares distributed on account of the $7.5 million backstop premium), subject to dilution on account of a management incentive plan. Term lenders that participate would receive the other 44.9% of reorganized equity, subject to dilution by the MIP. If the plan is not confirmed and consummated, the DIP and backstop premium would be payable in cash.
General unsecured creditors would share $500,000 if they vote to accept the plan. If they vote to reject, they would receive the minimum treatment required to confirm the plan.
Under the RSA, the new board of the reorganized debtors would consist of:
- Teffner, the interim chair;
- The CEO;
- A director designated by Bain Capital;
- A director designated by Monarch Alternative Capital;
- A director designated collectively by Bain, Eaton Vance, Lion Point and Monarch; and
- Two directors determined by the backstop commitment parties.
Up to 10% of reorganized equity would be reserved for a management incentive plan.
The RSA also includes a term sheet for the $311.8 million first-out term exit facility and $88.2 million second-out term exit facility. Under the term sheet, these exit facilities would be secured by a lien on substantially all of the debtors’ assets. According to the term sheet, the “Definitive Documentation” shall “contain a ‘Momentive’ provision satisfactory to the Required Consenting Stakeholders.” Terms of the exit facilities are described below.
The exit term facility term sheet includes as a condition precedent that “with respect to store leases which are not rejected” the debtors must obtain “aggregate annual cost savings for FY2020 of at least $18 million.” Further, the term sheet provides that, with respect to the debtors’ premium segment and Lane Bryant (for example, the core brands), “the number of store closures that shall have occurred prior to the Effective Date shall be consistent with the closures anticipated under the Company’s business plan provided to the Ad Hoc Committee Advisors (as determined by the Ad Hoc Committee Advisors in their reasonable discretion) or as otherwise consented to by the Required Consenting Stakeholders.”
The RSA contemplates typical third-party release and exculpation provisions in favor of the debtors, prepetition lenders, agents and their respective representatives. In addition, on the execution date of the RSA, all of the previously unencumbered equity held by the loan parties in the LuxCo entities will be pledged as collateral for the DIP.
The RSA includes the following milestones:
- July 26 (three days from the petition date): Entry of interim cash collateral order;
- Aug. 27 (35 days from the petition date): Entry of final DIP order;
- Sept. 21 (60 days from the petition date): Approval of disclosure statement;
- Nov. 10 (110 days from the petition date): Confirmation of the plan; and
- Nov. 30 (130 days from the petition date): Effective date.
DIP Financing Motion
The up to $311.8 million DIP would include up to $161.8 million of “rolled-up” prepetition loans and $150 million in new money funded half by the backstop group and the other half open to all prepetition term lenders. The proceeds of the new-money DIP loans may be used, among other things, to pay certain costs, fees and expenses and to prepay or repay up to $50 million of borrowings under the ABL credit agreement.
The DIP loan would mature in six months and pay a coupon of L+1,175 basis points with a 1% LIBOR floor. Additionally, lenders would receive a 2.5% commitment fee on the new-money portion. Backstop parties would receive $7.5 million in cash.
Collateral for the DIP would include a first priority lien on all collateral securing the term loan claims and all unencumbered assets (excluding any assets that qualify as ABL priority collateral, which shall be subject to a second priority lien), including, for the avoidance of doubt, a first priority interest in the funding account for the DIP term facility and 100% of the equity interests in the LuxCo entities.
The DIP term facility will convert on a dollar-for-dollar basis into first-out term loans as discussed below. If, after the DIP term facility has been funded and if the conversion does not occur, the DIP term loans would be repaid in cash on their stated maturity. In addition, in such a scenario, or upon the debtors selling all or substantially all of their assets, the company would pay the DIP term loan lenders a cash premium equal to 11.23%.
Adequate Protection
The company proposes as adequate protection for ABL lenders cash interest at the non-default rate according to the credit agreement in addition to certain superpriority claims and replacement liens. The debtors shall not allow the availability of the ABL to fall below 10% of the credit agreement amount, or $40 million. If the debtors fail to comply with the minimum availability, the debtors would be required to deposit cash into a controlled cash reserve account maintained by the ABL agent or pay down the ABL obligations to restore compliance. In addition to receiving adequate protection liens, term lenders would receive the reasonable and documented costs and out-of-pocket fees for professionals.
The carve-out for professional fees is $5 million.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
According to the motion, failing to obtain a final order on terms reasonably acceptable to the prepetition agents on or before 35 days after the petition date would constitute a cash collateral termination event.
Exit Facilities
Teffner’s declaration includes term sheets for the first-out and second-out exit term loans. The first-out exit term loan would total $311.8 million after the conversion from the DIP. The second-out term loan, distributed to prepetition lenders, would total $88.2 million. The first-out exit loan would mature in four years following the effective date and pay L+11.75%. The second out loan would mature in five years and pay L+11%, with 8.5% of the interest paid in kind until the second anniversary of the loan. In addition, the first-out loans would amortize at 1% per year through the second anniversary and 3% thereafter. The second-out loans would amortize at 1% per year for the life of the loan.
The loans would be guaranteed jointly and severally on a senior basis by the direct parent of the borrower and each existing and subsequently acquired or organized direct or indirect material domestic subsidiary, material foreign subsidiary and (x) each Luxembourg subsidiary, (y) each guarantor party to the prepetition term loan credit agreement and (z) each subsidiary owning material intellectual property. Material subsidiaries would represent those that generate at least 2.5% of total company EBITDA.
Operational Restructuring Motions
The debtors have filed a number of motions to address operational matters including store closing sales and rejection of executory contracts and unexpired leases. Overall, the debtors anticipate closing at least approximately 1,100 store locations, disclosed in an exhibit to their store closing motion. The debtors may need to close additional stores “to the extent lease negotiations are unsuccessful,” the motion notes. Relatedly, the debtors have filed a motion to reject the leases for their previously closed and closing stores.
The store closing motion seeks approval to assume a July 22 consulting agreement with SB360 Capital Partners which would entitle SB360 to a consulting fee of 0.95% of gross proceeds plus 15% of gross sales of FF&E, “net only of sales tax.” SB360 would conduct store closing sales at all closing Catherines and Justice stores and select premium brand closing stores in Canada, Puerto Rico and Hawaii. Malfitano Advisors would separately close certain premium brand stores in the U.S.
The debtors filed a rejection procedures motion to address executory contracts and unexpired leases generally. Separately, the debtors filed a motion to reject franchise agreements for the Justice and LOFT brands with foreign franchisees.
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. 20-33113.
- Motion to establish trading procedures
- The debtors seek entry of initial and final orders to establish trading procedures for its common stock and to be able to object to and prevent transfers if necessary to preserve net operating losses.
- The debtors estimate that as of Aug. 3, 2019, they had approximately $277.4 million of federal NOLs; $32.6 million of IRC section 163(j) deferred interest expense deductions; $2.6 million of general business credit carryforwards; and $2.6 million of charitable contribution carryforwards.
- The debtors further estimate that in the tax year ending Aug. 1, 2020, they may have generated approximately $500,000 of charitable contribution carryforwards; $434.8 million of federal NOLs; $95.2 million of IRC interest expense deductions; and $703,133 of general business credit carryforwards.
- Motion to pay employee wages and benefits
- Motion to use cash management system
- Motion to maintain insurance programs
- Motion to pay prepetition lien claimants
- Motion to pay taxes and fees
- Motion to maintain customer programs
- Motion to provide utilities with adequate assurance
- Application to appoint Prime Clerk as claims agent
- Motion to extend time to file schedules
- Motion to establish case management procedures
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