Fred’s, Inc.
CASE SUMMARY: Fred’s to Sell Pharmacy Assets While Winding Down Operations; Liquidation Sales at All Retail Locations Expected to Close in 60 Days
Mon 09/09/2019 17:27 PM
Relevant Documents:
Voluntary Petition
Press Release
First Day Declaration
DIP Financing Motion
Store Closing Sales Procedures Motion
Pharmacy Asset Sale Procedures Motion
First Day Hearing Agenda
Fred’s, Inc., a discount general merchandise store operator, filed for chapter 11 protection today in the Bankruptcy Court for the District of Delaware amid “severely constrained” cash flows and defaults under its prepetition credit facility. In a press release today, the company says that Fred’s “is committed to ensuring an orderly wind-down of its operations, and has commenced liquidation sales at all retail locations, which are expected to close over the next 60 days.” The company says that it expects to continue fulfilling pharmacy prescriptions at most of its pharmacy locations, while it continues to pursue the sale of its pharmacies as part of the chapter 11 process. Fred’s is requesting a $35 million asset based revolving DIP facility from prepetition lenders Regions Bank and Bank of America that would include a rollup of the prepetition credit facility.
The first day hearing has been scheduled for Tuesday, Sept. 10, at 3 p.m. ET.
Fred’s reports $474.8 million in assets and $380.2 million in liabilities as of May 4. The company’s prepetition capital structure includes:
The Cardinal liens are contractually subordinated to the prepetition revolver liens, according to the first day declaration by Mark Renzi, the debtors’ chief restructuring officer.
The debtors refer to GE Commercial Finance Business Property Corporation as the Summit Lender, which was granted a security interest in certain property of debtor Summit Properties-Jacksboro, LLC under a promissory note (which rights, the debtors say, have been acquired by Fidelity Bank) and of debtor Summit Properties-Bridgeport, LLC under a promissory note (which rights, the debtors say, have been acquired by EverBank).
According to the first day declaration, the debtors have been executing turnaround strategies for more than a year, including the implementation of “front store” optimizations through cuts to staff and other operating expenses and “fomenting growth in new categories such as closeouts, beer and wine, lottery and expansion of private brand offerings throughout many departments.” The company retained PJ Solomon in April 2019 to review a “full range of strategic alternatives,” after which point the company evaluated its store portfolio and made decisions to close underperforming stores and sell additional pharmacy assets. Fred’s board approved a plan to shutter 159 underperforming stores on April 11, an additional 104 stores on May 16, 49 more stores on July 5 and 129 further stores on July 12.
The debtors were in default under the prepetition revolving facility in the months before the petition date, with the facility in an overadvance state. Despite certain forbearance agreements, a restructuring committee (which was appointed on July 24) along with the debtors determined that an alternative source of financing was needed.
The debtors also completed a sale within the last month of 38 of its retail pharmacies to a subsidiary of CVS for a cash purchase price of $11.7 million, plus $3.5 million for inventory. The debtors also sold certain prescription files and related data and records, retail pharmaceutical inventory and other assets from 179 pharmacy locations to Walgreen Co. for a purchase price of approximately $176.7 million during the fourth quarter of fiscal 2018.
The debtors are represented by Kasowitz Benson Torres as bankruptcy counsel, Morris Nichols Arsht & Tunnell as Delaware counsel, Akin Gump Strauss Hauer & Feld as special counsel and BRG Group as financial advisors. Epiq is the claims agent. The case has been assigned to Judge Christopher S. Sontchi (case no. 19-11984).
Background
Founded in 1947, Fred’s stores serve low, middle and fixed-income families in towns of less than 15,000 in populations who “tend to be value-oriented and budget-conscious” and live in rural areas without easy access to large discount retailers. The stores stock more than 14,000 items that the debtors say address the everyday needs of their customers, including nationally recognized brand name products, proprietary “Fred’s” label products and lower priced off-brand products. As of May 4, 2018, Fred’s and its subsidiaries operated 556 general merchandise and pharmacy stores, including 11 franchised locations, in multiple states in the southeastern United States. The company had 2,642 full time and 3,930 part-time employees as of February 2019.
As of May 2019, Fred’s company-owned, full service stores had an average selling space of 14,684 square feet. Fred’s operations are typically managed at the individual store level, with primary operations at each of these locations consisting of general merchandise, or “front store” operations, and pharmacy operations. Fred’s says it has maintained low opening price points and competitive prices on key products across all departments and regularly offered seasonal specials and promotions supported by direct mail, newspaper, social media and email advertising. Seasonal specials, private label products and closeout merchandise supplemented the selection of merchandise. In 169 of its locations, front store operations were supplemented by a full service pharmacy, “sometimes the only pharmacies in the town or county.”
The table below provides a snapshot regarding the debtors’ stores and pharmacies during the prior three fiscal years:
Fred’s corporate organizational structure is as follows:
The debtors' largest unsecured creditors are listed below:
The case representatives are as follows:
DIP Financing Motion
The debtors request approval of $35 million in DIP financing in the form of a secured, superpriority asset based revolving credit facility from Regions Bank as administrative and collateral agent and Bank of America as co-collateral agent, letter of credit issuer and lender. The DIP commitments are $17.5 million from Regions Bank and $17.5 million from Bank of America. The debtors seek approval of an interim rollup whereby postpetition proceeds and collections would be applied to pay down the prepetition revolving credit facility debt, and a full rollup on a final basis. In support of the rollup, the debtors say that the prepetition revolving lenders are oversecured.
The DIP financing bears interest at the “Base Rate” plus 3.25%, with 2% added for the default rate, and matures the earliest of six months after the DIP loan closing date, 35 days after entry of the interim order if a final DIP order has yet to be entered, the effective date of an “Acceptable Plan” or date of entry of confirmation order with respect to any other chapter 11 plan, filing of a plan that is not an “Acceptable Plan,” or sale closing.
The DIP liens do not prime the Summit Lender with respect to its collateral, and the debtors contend that Cardinal is being adequately protected. The debtors propose a lien on proceeds of Bankruptcy Code section 549 actions on an interim basis, and on a final basis, avoidance actions and their proceeds.
According to the proposed interim order, “the total gross book value of all Prepetition Inventory as of the Petition Date was approximately $42.5 million.”
The facility includes various fees, including a 2% upfront fee, 0.375% letter of credit fronting fee, $4,250 monthly collateral monitoring fee, $250,000 arrangement fee, $25,000 administrative fee, $1,000 daily field examination fee, 0.5% unused line fee, and a letter of credit fee of the “Base Rate” plus 3.25% multiplied by the maximum availability to be drawn under letters of credit.
Adequate Protection
The company proposes adequate protection in the form of replacement liens for the prepetition revolving lenders and Cardinal.
In addition, subject to the 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 carveout for professional fees is $5.25 million for pre-trigger fees and thereafter, $500,000.
DIP Budget
The proposed cash flow budget is HERE.
DIP Milestones
The DIP financing is subject to the following milestones:
The DIP financing is also subject to the following Rx sale milestones:
Real estate sale milestones are as follows:
The lien challenge deadline is the earliest of (a) entry of plan confirmation order, (b) entry of order approving the sale of substantially all assets of any debtor and (c) 60 days after appointment for an official creditors’ committee or for other parties in interest, 75 days after entry of the interim order. The UCC lien investigation budget is $50,000.
Store Closing Sales Motion
The debtors seek to assume a consulting agreement with SB360 Capital Partners to conduct store closing sales at approximately 80 stores, as listed HERE. Fred’s has determined to close and wind down its remaining brick-and-mortar stores, after closing approximately 441 underperforming stores through four prepetition phases. SB360 would manage the store closings, sell the debtors’ rolling stock, sell equipment the debtors schedule to be sold at their distribution center in Dublin, Ga., and sell all goods located in the stores. The store closing sales would be completed by Oct. 31. SB360 would be entitled to a fee of 0.5% of “Gross Proceeds of Store Assets,” and a fee of 12.5% of “Gross Proceeds” from the sale of rolling stock and 15% of “Gross Proceeds” from the sale of distribution center furniture, fixtures and equipment. The consultant would also be allowed to supplement the merchandise with additional goods, for which the debtors would retain 10% of gross proceeds.
Motion to Approve Key Employee Incentive Plan and Key Employee Retention Plan
The debtors request approval of a key employee incentive plan and key employee retention plan, proposing administrative expense priority status to all payments to be made under the plans.
KEIP
The KEIP is for four employees, ranging from $782,500 in the aggregate to approximately $1.6 million in the aggregate. The KEIP targets are tied to net proceeds from GOB sales and net proceeds from pharmacy sales and real estate sales. Upon meeting the threshold, the KEIP participants would be entitled to 25% of their salary ($391,250 in the aggregate) upon the attainment of at least $16 million in net proceeds from GOB sales and would be entitled to 25% of their salary ($391,250 in the aggregate) upon the attainment of at least $18 million in net proceeds from the pharmacy sales and real estate sales. Thereafter, the KEIP participants would be entitled to an additional 2.5% of their salary ($39,125 in the aggregate) for each incremental $1 million increase in net proceeds from the GOB sales, pharmacy sales and real estate sales combined, capped at 50% of the KEIP participants’ salary ($782,500 in the aggregate), or $1.6 million in total upon the attainment of $20 million in additional net proceeds (totaling $54 million in GOB sales, pharmacy sales and/or real estate sales).
KERP
The proposed KERP is for 28 participants with a total award pool of $286,160. KERP payments comprise between 8.3% to 20% of the participants’ base salary, with a mean of 9.2%.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
Press Release
First Day Declaration
DIP Financing Motion
Store Closing Sales Procedures Motion
Pharmacy Asset Sale Procedures Motion
First Day Hearing Agenda
| Summary |
| Fred’s operates a chain of discount general merchandise stores, with approximately 556 locations - 11 franchised - as of May 2019 |
| Attributes bankruptcy to “severely constrained cash flows” |
| Filed chapter 11 to wind down operations and sell pharmacy assets |
| Seeks $35 million in DIP financing from existing lenders |
The first day hearing has been scheduled for Tuesday, Sept. 10, at 3 p.m. ET.
Fred’s reports $474.8 million in assets and $380.2 million in liabilities as of May 4. The company’s prepetition capital structure includes:
- Secured debt:
- Revolving Loan (Regions Bank and Bank of America): $15.1 million owed, plus $8.8 million in letters of credit
- Cardinal Health, Inc. affiliates (Fred’s primary pharmaceutical wholesaler): $20.9 million
- GE Commercial Finance Business Property Corporation:
- Summit Properties-Jacksboro, LLC Debtor: $700,000
- Summit Properties-Bridgeport, LLC Debtor: $700,000
- Equity: Fred’s, Inc. is publicly traded, and Alden Global Capital LLC and Heath B. Freeman own 5% or more of the debtor’s voting securities.
The Cardinal liens are contractually subordinated to the prepetition revolver liens, according to the first day declaration by Mark Renzi, the debtors’ chief restructuring officer.
The debtors refer to GE Commercial Finance Business Property Corporation as the Summit Lender, which was granted a security interest in certain property of debtor Summit Properties-Jacksboro, LLC under a promissory note (which rights, the debtors say, have been acquired by Fidelity Bank) and of debtor Summit Properties-Bridgeport, LLC under a promissory note (which rights, the debtors say, have been acquired by EverBank).
According to the first day declaration, the debtors have been executing turnaround strategies for more than a year, including the implementation of “front store” optimizations through cuts to staff and other operating expenses and “fomenting growth in new categories such as closeouts, beer and wine, lottery and expansion of private brand offerings throughout many departments.” The company retained PJ Solomon in April 2019 to review a “full range of strategic alternatives,” after which point the company evaluated its store portfolio and made decisions to close underperforming stores and sell additional pharmacy assets. Fred’s board approved a plan to shutter 159 underperforming stores on April 11, an additional 104 stores on May 16, 49 more stores on July 5 and 129 further stores on July 12.
The debtors were in default under the prepetition revolving facility in the months before the petition date, with the facility in an overadvance state. Despite certain forbearance agreements, a restructuring committee (which was appointed on July 24) along with the debtors determined that an alternative source of financing was needed.
The debtors also completed a sale within the last month of 38 of its retail pharmacies to a subsidiary of CVS for a cash purchase price of $11.7 million, plus $3.5 million for inventory. The debtors also sold certain prescription files and related data and records, retail pharmaceutical inventory and other assets from 179 pharmacy locations to Walgreen Co. for a purchase price of approximately $176.7 million during the fourth quarter of fiscal 2018.
The debtors are represented by Kasowitz Benson Torres as bankruptcy counsel, Morris Nichols Arsht & Tunnell as Delaware counsel, Akin Gump Strauss Hauer & Feld as special counsel and BRG Group as financial advisors. Epiq is the claims agent. The case has been assigned to Judge Christopher S. Sontchi (case no. 19-11984).
Background
Founded in 1947, Fred’s stores serve low, middle and fixed-income families in towns of less than 15,000 in populations who “tend to be value-oriented and budget-conscious” and live in rural areas without easy access to large discount retailers. The stores stock more than 14,000 items that the debtors say address the everyday needs of their customers, including nationally recognized brand name products, proprietary “Fred’s” label products and lower priced off-brand products. As of May 4, 2018, Fred’s and its subsidiaries operated 556 general merchandise and pharmacy stores, including 11 franchised locations, in multiple states in the southeastern United States. The company had 2,642 full time and 3,930 part-time employees as of February 2019.
As of May 2019, Fred’s company-owned, full service stores had an average selling space of 14,684 square feet. Fred’s operations are typically managed at the individual store level, with primary operations at each of these locations consisting of general merchandise, or “front store” operations, and pharmacy operations. Fred’s says it has maintained low opening price points and competitive prices on key products across all departments and regularly offered seasonal specials and promotions supported by direct mail, newspaper, social media and email advertising. Seasonal specials, private label products and closeout merchandise supplemented the selection of merchandise. In 169 of its locations, front store operations were supplemented by a full service pharmacy, “sometimes the only pharmacies in the town or county.”
The table below provides a snapshot regarding the debtors’ stores and pharmacies during the prior three fiscal years:
Fred’s corporate organizational structure is as follows:
(Click HERE to enlarge)
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Claim |
|---|---|---|---|
| Richard H. Sain | Murfreesboro, Tenn. | Trade/Vendor | $ 6,575,743 |
| Bradley Wooldridge | Spring Hill, Tenn. | Trade/Vendor | 6,554,925 |
| PPS Data LLC | Murray, Utah | Trade/Vendor | 1,825,501 |
| Deloitte Consulting LLP | Calgary, Alberta | Trade/Vendor | 1,737,827 |
| UXC Eclipse (USA) LLC | Tysons, Va. | Trade/Vendor | 1,207,487 |
| Reckitt Benckiser | Parsippany, N.J. | Trade/Vendor | 677,243 |
| Grant Thornton LLP | Milwaukee | Trade/Vendor | 665,374 |
| Novus Media LLC | Plymouth, Minn. | Trade/Vendor | 615,210 |
| Bio-Lab Inc. | Lawrenceville, Ga. | Trade/Vendor | 613,761 |
| JDA Software Inc. | Scottsdale, Ariz. | Trade/Vendor | 531,332 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel | Adam L. Shiff | Kasowitz Benson Torres |
New York |
| Robert M. Novick | |||
| Matthew B. Stein | |||
| Shai Schmidt | |||
| Debtors' Co-Counsel | Derek C. Abbott | Morris, Nichols, Arsht & Tunnell |
Wilmington, Del. |
| Andrew R. Remming | |||
| Matthew B. Harvey | |||
| Joseph C. Barsalona II | |||
| Debtors' Special Counsel | N/A | Akin Gump Strauss Hauer & Feld |
N/A |
| Debtors' Financial Advisor and CRO |
Mark A. Renzi (CRO) | Berkeley Research Group |
Los Angeles |
| DIP Agent's Co-Counsel | Eric W. Anderson | Parker Hudson Rainer & Dobbs |
Atlanta |
| Bryan Bates | |||
| DIP Agent's Co-Counsel | John H. Knight | Richards, Layton & Finger |
Wilmington, Del. |
| Counsel to Bank of America |
John F. Ventola | Choate, Hall & Stewart |
Boston |
| Emily J. Holt | |||
| Debtors' Claims Agent | Brian Hunt | Epiq Corporate Restructuring |
New York |
DIP Financing Motion
The debtors request approval of $35 million in DIP financing in the form of a secured, superpriority asset based revolving credit facility from Regions Bank as administrative and collateral agent and Bank of America as co-collateral agent, letter of credit issuer and lender. The DIP commitments are $17.5 million from Regions Bank and $17.5 million from Bank of America. The debtors seek approval of an interim rollup whereby postpetition proceeds and collections would be applied to pay down the prepetition revolving credit facility debt, and a full rollup on a final basis. In support of the rollup, the debtors say that the prepetition revolving lenders are oversecured.
The DIP financing bears interest at the “Base Rate” plus 3.25%, with 2% added for the default rate, and matures the earliest of six months after the DIP loan closing date, 35 days after entry of the interim order if a final DIP order has yet to be entered, the effective date of an “Acceptable Plan” or date of entry of confirmation order with respect to any other chapter 11 plan, filing of a plan that is not an “Acceptable Plan,” or sale closing.
The DIP liens do not prime the Summit Lender with respect to its collateral, and the debtors contend that Cardinal is being adequately protected. The debtors propose a lien on proceeds of Bankruptcy Code section 549 actions on an interim basis, and on a final basis, avoidance actions and their proceeds.
According to the proposed interim order, “the total gross book value of all Prepetition Inventory as of the Petition Date was approximately $42.5 million.”
The facility includes various fees, including a 2% upfront fee, 0.375% letter of credit fronting fee, $4,250 monthly collateral monitoring fee, $250,000 arrangement fee, $25,000 administrative fee, $1,000 daily field examination fee, 0.5% unused line fee, and a letter of credit fee of the “Base Rate” plus 3.25% multiplied by the maximum availability to be drawn under letters of credit.
Adequate Protection
The company proposes adequate protection in the form of replacement liens for the prepetition revolving lenders and Cardinal.
In addition, subject to the 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 carveout for professional fees is $5.25 million for pre-trigger fees and thereafter, $500,000.
DIP Budget
The proposed cash flow budget is HERE.
DIP Milestones
The DIP financing is subject to the following milestones:
- Sept. 9: File GOB sale motion through SB360 Capital Partners
- Sept. 12: Entry of interim DIP order, GOB sale motion
- Oct. 15: Entry of final DIP order
- Oct. 30: Completion of GOB sales
The DIP financing is also subject to the following Rx sale milestones:
- Sept. 9: File sale procedures motion for the debtors’ pharmacy scripts and pharmacy inventory
- Sept. 23: Entry of Rx sale procedures order
- Oct. 18: Rx sale closing
Real estate sale milestones are as follows:
- Sept. 16: File real estate sale procedures motion
- Oct. 7: Entry of sale procedures order
- Oct. 17: Real estate auction
- Nov. 15: Real estate sale closing
The lien challenge deadline is the earliest of (a) entry of plan confirmation order, (b) entry of order approving the sale of substantially all assets of any debtor and (c) 60 days after appointment for an official creditors’ committee or for other parties in interest, 75 days after entry of the interim order. The UCC lien investigation budget is $50,000.
Store Closing Sales Motion
The debtors seek to assume a consulting agreement with SB360 Capital Partners to conduct store closing sales at approximately 80 stores, as listed HERE. Fred’s has determined to close and wind down its remaining brick-and-mortar stores, after closing approximately 441 underperforming stores through four prepetition phases. SB360 would manage the store closings, sell the debtors’ rolling stock, sell equipment the debtors schedule to be sold at their distribution center in Dublin, Ga., and sell all goods located in the stores. The store closing sales would be completed by Oct. 31. SB360 would be entitled to a fee of 0.5% of “Gross Proceeds of Store Assets,” and a fee of 12.5% of “Gross Proceeds” from the sale of rolling stock and 15% of “Gross Proceeds” from the sale of distribution center furniture, fixtures and equipment. The consultant would also be allowed to supplement the merchandise with additional goods, for which the debtors would retain 10% of gross proceeds.
Motion to Approve Key Employee Incentive Plan and Key Employee Retention Plan
The debtors request approval of a key employee incentive plan and key employee retention plan, proposing administrative expense priority status to all payments to be made under the plans.
KEIP
The KEIP is for four employees, ranging from $782,500 in the aggregate to approximately $1.6 million in the aggregate. The KEIP targets are tied to net proceeds from GOB sales and net proceeds from pharmacy sales and real estate sales. Upon meeting the threshold, the KEIP participants would be entitled to 25% of their salary ($391,250 in the aggregate) upon the attainment of at least $16 million in net proceeds from GOB sales and would be entitled to 25% of their salary ($391,250 in the aggregate) upon the attainment of at least $18 million in net proceeds from the pharmacy sales and real estate sales. Thereafter, the KEIP participants would be entitled to an additional 2.5% of their salary ($39,125 in the aggregate) for each incremental $1 million increase in net proceeds from the GOB sales, pharmacy sales and real estate sales combined, capped at 50% of the KEIP participants’ salary ($782,500 in the aggregate), or $1.6 million in total upon the attainment of $20 million in additional net proceeds (totaling $54 million in GOB sales, pharmacy sales and/or real estate sales).
KERP
The proposed KERP is for 28 participants with a total award pool of $286,160. KERP payments comprise between 8.3% to 20% of the participants’ base salary, with a mean of 9.2%.
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. 19-11984 (CSS).
- Motion to Pay Lien Claimants and 503(b)(9) claimants
- The debtors seek to pay up to $212,000 in lien claimant obligations on an interim basis, with up to $338,000 in total relief sought on a final basis, according to the proposed orders, and to pay all Bankruptcy Code section 503(b)(9) claims in full.
- Motion to Pay Employee Wages and Benefits
- The company requests authority to pay up to approximately $3.1 million in employee obligations on an interim basis.
- Motion to Use Cash Management System
- A list of the company’s bank accounts can be found HERE.
- Motion to Maintain Insurance Programs
- Motion to Pay Taxes and Fees
- The debtors seek approval to pay up to $3.6 million in tax obligations on an interim basis, with up to $4.1 million in total relief sought on a final basis.
- Motion to Maintain Customer Programs
- Motion to Provide Utilities with Adequate Assurance
- Motion Extending the Deadline to File Schedules and Statements to Nov. 4
- Motion to Maintain Confidentiality of Pharmacy Customers
- Motion for Sale of De Minimis Pharmacy Assets
- The debtors request approval to sell certain de minimis and “otherwise expendable” pharmacy assets with a sale price of $1.5 million or less.
- Motion to Reject Certain Unexpired Leases of Nonresidential Real Property and Establishing Rejection Procedures
- The debtors explain that they ceased operations in 251 locations prepetition but remain subject to the respective leases. The debtors say that their review of leases remains ongoing, but initially seek to reject leases at the stores listed HERE, where they ceased operations and the leases are a “financial and administrative burden.”
- Application to Appoint Epiq as Claims Agent
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