Hollander Sleep Products, LLC
CASE SUMMARY (Middle Market): Hollander Plan Provides for ‘Substantial Deleveraging’ of Funded Debt, DIP Financing Commitments Totaling $118 Million and Toggle Feature for Potential Sale to Third Party
Mon 05/20/2019 18:53 PM
Relevant Documents:
Voluntary Petition
Press Release
First Day Declaration
Plan of Reorganization
DIP Financing Motion
Bid Procedures Motion
First Day Hearing Agenda
Hollander Sleep Products, a New York-based bed pillow, mattress pad and comforter manufacturer that produces products for licensed brands such as Ralph Lauren, Simmons, Beautyrest, Nautica and Calvin Klein, filed for chapter 11 protection on Sunday in the Bankruptcy Court for the Southern District of New York, along with six affiliates. Under “severe liquidity constraints,” the company entered into a restructuring support agreement with 100% of secured term loan lenders and Sentinel Capital Partners, an ABL lender and majority equityholder, on a “comprehensive restructuring process that will ensure the viability of the business.” The debtors say that the RSA provides a commitment from the debtors’ largest creditor constituency to support a substantial deleveraging of approximately $166.5 million of the debtors’ roughly $233 million funded debt and a “clear path to emergence.” In connection with the RSA, the debtors have also filed a plan of reorganization.
The asset-based secured lenders have agreed to provide a $90 million asset-based DIP loan facility and certain term loan lenders are providing an additional $28 million term loan DIP facility. Hollander has also secured an agreement to have the DIP term loan facility convert into a $58 million exit term loan facility upon emergence, which would include an additional $30 million in new money exit financing. Each exit loan lender, “in exchange for the commitment to fund the Exit Term Loan Facility,” would receive “its Pro Rata share of 40 percent of the New Interests outstanding on the Effective Date, subject to dilution for the Management Incentive Plan, and such other consideration as set forth in the Exit Facility Documents” (emphasis added).
Sentinel has agreed to support the plan, including rolling its participation interests in the prepetition asset-based financing facility and converting its loans, in a last-out position, in any proposed exit asset-based financing facility. The new money term loan exit financing is committed, “thus ensuring that the Company is able to finance its emergence from chapter 11 without the need to raise additional financing,” say the debtors.
The plan also includes a toggle feature that would allow for a potential sale to a third party supported by the secured lenders. “Thus, in all circumstances, and as contemplated in the RSA, the term loan lenders have agreed to support the confirmation of the plan,” according to Hollander CEO Marc Pfefferle. Houlihan Lokey has commenced a marketing process for Hollander’s assets and will continue to actively solicit the market for potential financial and strategic buyers, the debtors say. In connection with the potential toggle sale, the debtors filed a bid procedures motion for the sale of all or substantially all of the debtors’ assets, with a proposed bid deadline of July 26 and a proposed auction date of August 1.
Hollander and the stakeholders have agreed upon an expedited timeline to effectuate the restructuring, which is outlined as follows:
“These chapter 11 cases provide the Company with the opportunity to right-size operations and invest in equipment and processes that will allow it to utilize raw material more efficiently, lower its production costs in the long term, and re-establish parity with its competitors,” Pfefferle says in the first day declaration.
The first day hearing is set for Tuesday, May 21, at 3:30 p.m. ET.
The company reports $100 million to $500 million in both assets and liabilities, including approximately $233 million in funded debt and approximately $95 million owed to trade creditors. The debtors have approximately $523,000 in cash on hand. Hollander’s prepetition capital structure includes:
The ABL facility provides for cash dominion when the excess availability under the facility is less than either 12.5% of the maximum available credit or $12.5 million for three consecutive business days, at which point the ABL agent, Wells Fargo, can exercise certain controls over the debtors’ bank accounts. The debtors say that they have triggered the cash dominion provision, and the ABL agent sweeps the debtors’ accounts that are subject to control agreements, which includes substantially all of the debtors’ cash, daily. The ABL obligations are secured by a first lien on certain ABL-priority collateral, including certain accounts and inventory, Canadian assets and a second lien on certain collateral on which the prepetition term loan lenders have a first lien.
The term loan facility is secured by a first lien on certain collateral, except for Hollander Canada, and a second lien on certain collateral on which the ABL lenders have a first lien. Hollander Canada’s assets are not encumbered by the term loan facility; however, the term loan Facility is secured by a pledge of 65% of debtor Dream II Holdings’ equity interest in Hollander Canada.
In November 2018, the debtors entered into forbearances and an amendment to the ABL and term loan agreements. In connection with the amendments, Sentinel Capital Partners V, Sentinel Dream Blocker and Sentinel Capital Investors V entered into a Nov. 27, 2018, put agreement in favor of the ABL Agent and SunTrust Bank, an ABL Lender. Subject to the terms and conditions set forth in the Put Agreement, upon the occurrence of certain events of default under the ABL Credit Agreement, the ABL Agent may cause the Purchasers to execute an agreement to purchase a participation interest in a subordinated last-out loan (the “Last-Out Loan”).
The debtors say that substantial price increases on materials have “significantly reduced” Hollander’s profit margins for many products, “which are generally sold on low profit margins to begin with.” The company has also been integrating the operations of Pacific Coast Feather Company, which was acquired in 2017. “Notwithstanding that the acquisition itself has otherwise been a net positive for operations,” the debtors explain, it has required the expenditure of additional capital. With $233 million of outstanding indebtedness and limited access to credit, the company is facing “severe” liquidity constraints. “Material and other significant cost increases combined with continued integration overhang following the PCF acquisition have caused severe liquidity constraints,” the debtors say, adding that, “considering the relentless competition in the overall marketplace, Hollander has been operating on its heels for the last several months.”
Debtor Hollander Sleep Products Canada Limited will commence proceedings under the Companies’ Creditors Arrangement Act, the debtors note, and Hollander Canada will request that the Canadian Court treat the chapter 11 case as a foreign main proceeding, similar to the chapter 15 process in the U.S.
The debtors are represented by Kirkland & Ellis as counsel and Houlihan Lokey as financial advisor and investment banker and are also working with Carl Marks Advisory Group and Proskauer Rose. Omni Management Group is the claims agent. The case has been assigned to Judge Michael E. Wiles (case no. 19-11608).
Background
Hollander, an “industry leader in the bedding products market,” manufactures pillows, comforters and mattress pads, which it produces for “well-known” licensed brands as well as its own proprietary brands such as Great Sleep, I AM, LC, PCF and Restful Nights. The company partners with major retailers and hotel chains, including longstanding relationships with Costco, Kohl’s, Walmart, Target and Marriott. The debtors generated approximately $526.9 million in net revenue in fiscal 2018 and have approximately 2,370 employees across the U.S. and Canada, of whom 511 are parties to a collective bargaining agreement.
The debtors’ corporate organizational structure is shown below:
The company’s origins date back to the 1950s, when Bernard Hollander began selling pillows door-to-door via a garage under the name Hollander Home Fashions. Over the next several decades, Hollander experienced “significant growth, both organically and through the acquisition of competitors,” the debtors say. The Hollander family sold the business to HGGC in 2009. Sentinel purchased the company from HGGC in 2014 and has been the Hollander’s controlling equityholder ever since. The debtors are headquartered in Boca Raton, Fla., operate a primary showroom in New York and have 13 manufacturing facilities throughout North America. Hollander’s non-debtor affiliates maintain a sourcing, product development and quality control office in China.
The debtors operate two main business segments: (i) top-of-bed, which includes bed pillows, mattress pads and toppers, comforters and foam products, and (ii) cushion, which includes natural-fill cushions. According to the company, Hollander is the largest bed pillow manufacturer in the world, producing over 75 million pillows annually, and maintains an estimated 35% share of the $1 billion bed pillow market. Historically, the bed pillow segment has been the most profitable and predictable segment within the basic bedding category, and bed pillows represent Hollander’s largest product category, the debtors say. The company also estimates that it has a 15% share of the $400 million mattress pad market and a 10% share of the $450 million comforter market. Hollander is also the largest provider of natural-fill cushions in the U.S., with an estimated 33% to 35% share, according to the company.
The debtors engaged with the ABL lenders and term loan lenders in November 2018, resulting in forbearances, amendments to the credit agreements and the put agreement, but they debtors recognized over the following months that “a more comprehensive solution was required.” In February 2019, the debtors discussed potential balance sheet solutions with their lenders to address liquidity issues ahead of a March interest payment deadline under the term loan agreement. “After exploring out-of-court possibilities, it became apparent that a significant deleveraging would be necessary.” Hollander retained Kirkland & Ellis in February, Carl Marks in March and Houlihan in May.
The debtors' largest unsecured creditors are listed below:
The case representatives are as follows:
Plan of Reorganization
Below is a chart of the plan’s classes, along with their impairment status and voting rights:
Treatment of Claims and Interests
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
Exit Facilities
The plan contemplates two “Exit Facilities”: an exit ABL facility (in an unspecified amount) and a $58 million exit term facility. The exact terms of the exit ABL facility are not specified. However, the plan does provide that each holder of an allowed DIP ABL claim would receive either payment in full or, “at such Holder’s election and agreement by the Debtors,” a pro rata share of the exit ABL facility. Further, the plan provides that if the term loan lenders are the winning bidder for the debtors’ assets, each holder of a last out DIP loan claim (or existing last out loan claim) would receive a pro rata share of the exit ABL facility on a last out basis.
According to the plan, the exit term facility would consist of a $28 million exit term loan facility provided by the DIP term loan lenders in consideration of the DIP term loan claims, and a $30 million new money exit term loan facility provided under the exit term loan credit agreement. The debtors indicate that they would use the proceeds “to fund ongoing operations and distributions under the Plan and to satisfy other Cash obligations under the Plan. The plan further provides that if the term loan lenders are the winning bidder for the debtors’ assets, then
Under the plan, if the term lenders are the winning bidder for the debtors’ assets, then each exit loan lender, “in exchange for the commitment to fund the Exit Term Loan Facility,” would receive “its Pro Rata share of 40 percent of the New Interests outstanding on the Effective Date, subject to dilution for the Management Incentive Plan, and such other consideration as set forth in the Exit Facility Documents” (emphasis added).
The plan provides that terms for the exit facilities “will be determined in accordance with the Reorganized Debtors’ contemplated post-Effective Date business plan following and depending on the results of the Auction (which may contemplate the continued ownership or operation of all or only some of the Debtors’ assets), and any documentation necessary to implement the Exit Facilities will be included in the Plan Supplement.”
Other Plan Provisions
The plan includes typical debtor and third party releases in favor of the debtors, prepetition agent and secured lenders, DIP agent and lenders, exit facility agent and lenders, the sponsor, RSA parties, and their respective affiliates, officers, directors and advisors. The plan’s release provisions are bracketed, and the debtors note that they are “subject to the satisfactory completion of a review of such releases and any investigation by the Debtors’ independent director into any potential claims and Causes of Action subject to such releases.”
The plan also includes typical exculpation provisions in favor of the debtors, any committees, the DIP agent and lenders, the ABL agent and lenders, the term loan agent and lenders, the exit facility agent and lenders, the sponsor, and the RSA parties and their respective affiliates, officers, directors and advisors.
Further, the plan contemplates assumption of all executory contracts not specifically rejected, including all employee wages, compensation, and benefit programs and collective bargaining agreements.
Bid Procedures / Sale Timeline
Through the bid procedures motion, the debtors are seeking to run their proposed plan and sale marketing processes “in parallel.” The motion describes the plan’s sale toggle feature as “authority to market test the transaction contemplated by the RSA and the Plan to ensure the Debtors obtain the highest or otherwise best offer, or combination of offers, for the Debtors’ assets.” The motion proposes a preliminary bid deadline of July 1, final bid deadline of July 26 and auction date of August 1. If no qualified bids are received by the bid deadline, the motion says that “the Term Loan Lenders will be deemed the Winning Bidder, and the Debtors will pursue entry of an order by the Bankruptcy Court confirming the Plan at the Confirmation Hearing.”
The debtors are also seeking authority to select one or more parties to act as a stalking horse bidder and to pay “customary” bid protections in the form of a breakup fee, expense reimbursement and/or work fee in an aggregate amount up to three percent of any proposed purchase price.
The proposed timeline for the sale and related plan process is as follows:
DIP Financing Motion
The debtors request approval of (a) a $90 million senior secured DIP ABL facility on a superpriority basis provided by the prepetition ABL lenders, with Wells Fargo Bank as agent and (b) a $28 million new-money DIP term loan facility for the debtors (other than debtor Hollander Sleep Products Canada Limited) on a senior secured and superpriority basis, provided by certain prepetition term loan lenders with Barings Finance as agent. The DIP ABL credit agreement provides for the refinancing of the prepetition ABL obligations upon entry of the interim order. “The Prepetition ABL Lenders are highly unlikely to continue to lend postpetition without the roll-up of the Prepetition ABL Obligations, given the concerns raised by the Prepetition ABL Lenders with respect to the coverage of their loans under the Debtors’ borrowing base and tight liquidity,” the debtors assert.
The debtors stress that the proposed DIP facilities show the lenders’ support for the proposed plan process because the term lenders have agreed to the RSA by which they would either own the reorganized business or be paid cash from a sale process, and in “either event they will support the Debtors’ exit through a chapter 11 plan and the payment of administrative expense and priority claims.”
In support of the proposed DIP financing, the debtors filed the declaration of Saul Burian of Houlihan Lokey, who states that the debtors need access to funding “imminently to ensure their ongoing viability,” adding that the postpetition financing, Burian believes, “will send a strong message to the Debtors’ key stakeholders that operations are and will continue to be adequately funded throughout the cases and that the Debtors have funding for a path to emergence.” Burian also says that the term loan lenders have “stepped up” by agreeing to roll the $28 million DIP term loan into an exit facility and to backstop an additional $30 million new money commitment, for a total exit facility of $58 million.
DIP ABL Facility
The DIP ABL facility bears interest at the “Base Rate” plus 2% or LIBOR + 4%, with 2% added for the default rate, and matures on the earliest of 150 days after the petition date, if a final order has not yet been entered within 40 days of the first day hearing and other customary events.
To secure the DIP ABL, the debtors propose to grant liens on substantially all assets of the “DIP ABL Loan Parties,” which includes all seven debtor entities. The debtors also propose a lien on proceeds of avoidance actions, subject to entry of the final order.
The company proposes adequate protection for the prepetition ABL parties in the form of replacement liens, payment of cash interest at the default rate (“other than on account of Last Out Loans and Last Out Obligations, provided that the Last Out Loans and Last Out Obligations shall accrue interest at the default rate as part of the Last Out Loans and Last Out Obligations”), principal due under the prepetition ABL documents (except for on account of Last Out Loans and Last Out Obligations) and fees and expenses under the DIP ABL credit agreement.
The DIP ABL would refinance the company’s prepetition ABL obligations via a “creeping” roll-up until entry of the final order, at which point all outstanding prepetition ABL borrowings would be deemed obligations under the DIP ABL facility.
DIP Term Loan Facility
The DIP term loan facility bears interest at the “Base Rate” plus 6% or LIBOR + 7%, with an additional 2% for the default rate of interest. The term loan facility matures on the same schedule as the ABL facility.
To secure the DIP term loan, the debtors propose to grant liens on substantially all assets of the “DIP Term Loan Parties,” which includes “all debtors, excluding ... Hollander Sleep Products Canada Limited.” Like the DIP ABL, the debtors also propose a lien on proceeds of avoidance actions, subject to entry of the final order.
The debtors propose adequate protection for the prepetition term loan parties in the form of replacement liens. Both the priority of the adequate protection liens and the adequate protection reservation are the same as the DIP ABL facility.
The DIP term loan provides that the lenders may be repaid “in the form of senior secured debt and equity in the reorganized Loan Parties on the Plan Effective Date of a confirmed Plan if a Plan as contemplated by the RSA is confirmed.”
In addition, 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), both subject to entry of a final order.
The aggregate carveout for professional fees is $1.25 million.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
DIP Milestones
Both DIP loans are subject to the following milestones:
The lien challenge deadline for both facilities is 75 days after entry of the Final DIP order if no official creditors’ committee is formed, and if a committee is formed, 60 days after entry of the final order.
The debtors seek approval of a closing fee, unused revolver fee and letter of credit fee under the DIP ABL facility, and a commitment fee, backstop fee, DIP term loan agent fee, unused commitment fee and exit fee under the DIP term loan facility. The debtors have sought to seal the DIP fee letters. The debtors also filed a motion seeking to enter into an exit backstop commitment letter and fee letter, as well as a related motion to seal.
Surety Motion
The debtors filed a motion seeking to continue and renew their surety bond program. In the ordinary course of business, the motion states, certain statutes, rules, and regulations require that the debtors provide surety bonds to certain third parties - often to governmental units or other public agencies - to secure the debtors’ payment or performance of certain obligations, including custom liabilities. Without the surety bond program, the debtors say, Hollander would not be able to continue importing products across U.S. borders. A table summarizing the surety bonds currently maintained by the debtors is as follows:
Motion to Authorize Foreign Representative
Hollander seeks authorization for Hollander to act as the foreign representative in the Canadian proceeding.
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
Press Release
First Day Declaration
Plan of Reorganization
DIP Financing Motion
Bid Procedures Motion
First Day Hearing Agenda
| Summary |
| Hollander Sleep Products manufactures bed pillows, mattress pads and comforters for licensed brands as well as its own private labels |
| Attributes bankruptcy to “severe liquidity constraints," including only $523,000 cash on hand, due to rising materials costs and expenditures required by its acquisition of Pacific Coast Feather Company in 2017 |
| Entered into RSA with “largest creditor constituency” to implement deleveraging of funded debt by $166.5 million |
| Seeks $90 million DIP ABL facility and $28 million DIP term loan facility; DIP term loan facility would be converted into $58 million exit facility upon emergence |
Hollander Sleep Products, a New York-based bed pillow, mattress pad and comforter manufacturer that produces products for licensed brands such as Ralph Lauren, Simmons, Beautyrest, Nautica and Calvin Klein, filed for chapter 11 protection on Sunday in the Bankruptcy Court for the Southern District of New York, along with six affiliates. Under “severe liquidity constraints,” the company entered into a restructuring support agreement with 100% of secured term loan lenders and Sentinel Capital Partners, an ABL lender and majority equityholder, on a “comprehensive restructuring process that will ensure the viability of the business.” The debtors say that the RSA provides a commitment from the debtors’ largest creditor constituency to support a substantial deleveraging of approximately $166.5 million of the debtors’ roughly $233 million funded debt and a “clear path to emergence.” In connection with the RSA, the debtors have also filed a plan of reorganization.
The asset-based secured lenders have agreed to provide a $90 million asset-based DIP loan facility and certain term loan lenders are providing an additional $28 million term loan DIP facility. Hollander has also secured an agreement to have the DIP term loan facility convert into a $58 million exit term loan facility upon emergence, which would include an additional $30 million in new money exit financing. Each exit loan lender, “in exchange for the commitment to fund the Exit Term Loan Facility,” would receive “its Pro Rata share of 40 percent of the New Interests outstanding on the Effective Date, subject to dilution for the Management Incentive Plan, and such other consideration as set forth in the Exit Facility Documents” (emphasis added).
Sentinel has agreed to support the plan, including rolling its participation interests in the prepetition asset-based financing facility and converting its loans, in a last-out position, in any proposed exit asset-based financing facility. The new money term loan exit financing is committed, “thus ensuring that the Company is able to finance its emergence from chapter 11 without the need to raise additional financing,” say the debtors.
The plan also includes a toggle feature that would allow for a potential sale to a third party supported by the secured lenders. “Thus, in all circumstances, and as contemplated in the RSA, the term loan lenders have agreed to support the confirmation of the plan,” according to Hollander CEO Marc Pfefferle. Houlihan Lokey has commenced a marketing process for Hollander’s assets and will continue to actively solicit the market for potential financial and strategic buyers, the debtors say. In connection with the potential toggle sale, the debtors filed a bid procedures motion for the sale of all or substantially all of the debtors’ assets, with a proposed bid deadline of July 26 and a proposed auction date of August 1.
Hollander and the stakeholders have agreed upon an expedited timeline to effectuate the restructuring, which is outlined as follows:
“These chapter 11 cases provide the Company with the opportunity to right-size operations and invest in equipment and processes that will allow it to utilize raw material more efficiently, lower its production costs in the long term, and re-establish parity with its competitors,” Pfefferle says in the first day declaration.
The first day hearing is set for Tuesday, May 21, at 3:30 p.m. ET.
The company reports $100 million to $500 million in both assets and liabilities, including approximately $233 million in funded debt and approximately $95 million owed to trade creditors. The debtors have approximately $523,000 in cash on hand. Hollander’s prepetition capital structure includes:
The ABL facility provides for cash dominion when the excess availability under the facility is less than either 12.5% of the maximum available credit or $12.5 million for three consecutive business days, at which point the ABL agent, Wells Fargo, can exercise certain controls over the debtors’ bank accounts. The debtors say that they have triggered the cash dominion provision, and the ABL agent sweeps the debtors’ accounts that are subject to control agreements, which includes substantially all of the debtors’ cash, daily. The ABL obligations are secured by a first lien on certain ABL-priority collateral, including certain accounts and inventory, Canadian assets and a second lien on certain collateral on which the prepetition term loan lenders have a first lien.
The term loan facility is secured by a first lien on certain collateral, except for Hollander Canada, and a second lien on certain collateral on which the ABL lenders have a first lien. Hollander Canada’s assets are not encumbered by the term loan facility; however, the term loan Facility is secured by a pledge of 65% of debtor Dream II Holdings’ equity interest in Hollander Canada.
In November 2018, the debtors entered into forbearances and an amendment to the ABL and term loan agreements. In connection with the amendments, Sentinel Capital Partners V, Sentinel Dream Blocker and Sentinel Capital Investors V entered into a Nov. 27, 2018, put agreement in favor of the ABL Agent and SunTrust Bank, an ABL Lender. Subject to the terms and conditions set forth in the Put Agreement, upon the occurrence of certain events of default under the ABL Credit Agreement, the ABL Agent may cause the Purchasers to execute an agreement to purchase a participation interest in a subordinated last-out loan (the “Last-Out Loan”).
The debtors say that substantial price increases on materials have “significantly reduced” Hollander’s profit margins for many products, “which are generally sold on low profit margins to begin with.” The company has also been integrating the operations of Pacific Coast Feather Company, which was acquired in 2017. “Notwithstanding that the acquisition itself has otherwise been a net positive for operations,” the debtors explain, it has required the expenditure of additional capital. With $233 million of outstanding indebtedness and limited access to credit, the company is facing “severe” liquidity constraints. “Material and other significant cost increases combined with continued integration overhang following the PCF acquisition have caused severe liquidity constraints,” the debtors say, adding that, “considering the relentless competition in the overall marketplace, Hollander has been operating on its heels for the last several months.”
Debtor Hollander Sleep Products Canada Limited will commence proceedings under the Companies’ Creditors Arrangement Act, the debtors note, and Hollander Canada will request that the Canadian Court treat the chapter 11 case as a foreign main proceeding, similar to the chapter 15 process in the U.S.
The debtors are represented by Kirkland & Ellis as counsel and Houlihan Lokey as financial advisor and investment banker and are also working with Carl Marks Advisory Group and Proskauer Rose. Omni Management Group is the claims agent. The case has been assigned to Judge Michael E. Wiles (case no. 19-11608).
Background
Hollander, an “industry leader in the bedding products market,” manufactures pillows, comforters and mattress pads, which it produces for “well-known” licensed brands as well as its own proprietary brands such as Great Sleep, I AM, LC, PCF and Restful Nights. The company partners with major retailers and hotel chains, including longstanding relationships with Costco, Kohl’s, Walmart, Target and Marriott. The debtors generated approximately $526.9 million in net revenue in fiscal 2018 and have approximately 2,370 employees across the U.S. and Canada, of whom 511 are parties to a collective bargaining agreement.
The debtors’ corporate organizational structure is shown below:
The company’s origins date back to the 1950s, when Bernard Hollander began selling pillows door-to-door via a garage under the name Hollander Home Fashions. Over the next several decades, Hollander experienced “significant growth, both organically and through the acquisition of competitors,” the debtors say. The Hollander family sold the business to HGGC in 2009. Sentinel purchased the company from HGGC in 2014 and has been the Hollander’s controlling equityholder ever since. The debtors are headquartered in Boca Raton, Fla., operate a primary showroom in New York and have 13 manufacturing facilities throughout North America. Hollander’s non-debtor affiliates maintain a sourcing, product development and quality control office in China.
The debtors operate two main business segments: (i) top-of-bed, which includes bed pillows, mattress pads and toppers, comforters and foam products, and (ii) cushion, which includes natural-fill cushions. According to the company, Hollander is the largest bed pillow manufacturer in the world, producing over 75 million pillows annually, and maintains an estimated 35% share of the $1 billion bed pillow market. Historically, the bed pillow segment has been the most profitable and predictable segment within the basic bedding category, and bed pillows represent Hollander’s largest product category, the debtors say. The company also estimates that it has a 15% share of the $400 million mattress pad market and a 10% share of the $450 million comforter market. Hollander is also the largest provider of natural-fill cushions in the U.S., with an estimated 33% to 35% share, according to the company.
The debtors engaged with the ABL lenders and term loan lenders in November 2018, resulting in forbearances, amendments to the credit agreements and the put agreement, but they debtors recognized over the following months that “a more comprehensive solution was required.” In February 2019, the debtors discussed potential balance sheet solutions with their lenders to address liquidity issues ahead of a March interest payment deadline under the term loan agreement. “After exploring out-of-court possibilities, it became apparent that a significant deleveraging would be necessary.” Hollander retained Kirkland & Ellis in February, Carl Marks in March and Houlihan in May.
The debtors' largest unsecured creditors are listed below:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| Roind Hometex Co Ltd | Las Vegas, NV | Vendor | $ 5,655,096 |
| Funing Jincheng Home Textile Co Ltd |
Jiangsu, China | Vendor | 5,273,061 |
| Invista Inc | Atlanta | Vendor | 5,023,244 |
| Hangzhou Chuangyuan Feather Co Ltd |
Hangzhou, China | Vendor | 5,001,800 |
| Zhejiang Hengdi Bedding Co Ltd |
Hangzhou, China | Vendor | 3,882,945 |
| Zhejiang Liuqiao Home Textile |
Hangzhou, China | Vendor | 3,465,270 |
| Wuhu Fine Textile International Trading Co Ltd |
Wanzhi Town, China | Vendor | 3,419,367 |
| Packaging Corp of America |
Chicago | Vendor | 3,341,952 |
| Sun Fiber Sales LLC | Chicago | Vendor | 2,694,931 |
| Zhejiang Wanxiang Bedding Co Ltd |
Zhejiang, China | Vendor | 2,492,407 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Counsel | Joshua A. Sussberg | Kirkland & Ellis | New York |
| Christopher T. Greco | |||
| Joseph M. Graham | |||
| Debtors' Financial Advisor and Investment Banker |
Saul Burian | Houlihan Lokey Capital |
New York |
| Debtors' CEO | Marc L. Pfefferle | Carl Marks Advisory Group |
New York |
| Debtors' Claims Agent | Alison Miller | Omni Management Group |
New York |
| Counsel to the DIP & Prepetition ABL Agent - Wells Fargo Bank |
Randall Klein | Goldberg Kohn | Chicago |
| Prisca Kim | |||
| Counsel to the DIP & Prepetition Term Loan Agent - Barings Finance |
W. Austin Jowers | King & Spalding | New York |
| Christopher Boies | |||
| Stephen M. Blank | |||
Below is a chart of the plan’s classes, along with their impairment status and voting rights:
Treatment of Claims and Interests
The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:
- Class 1 - Other priority claims: At the option of the reorganized debtors, except to the extent that a holder of an allowed other priority claim agrees to less favorable treatment, (i) payment in full in cash or (ii) other treatment rendering the allowed claim unimpaired.
- Class 2 - Other secured claims: At the option of the reorganized debtors, except to the extent that a holder of an allowed other secured claim agrees to less favorable treatment, (i) payment in full in cash, (ii) collateral securing the holder’s allowed claim, (iii) reinstatement or (iv) such other treatment rendering the holder’s allowed claim. Unimpaired
- Class 3 - Secured tax claims: At the option of the reorganized debtors, except to the extent that a holder of an allowed other priority claim agrees to less favorable treatment, (i) payment in full in cash or (ii) equal semi-annual cash payments commencing as of the effective date or as soon as reasonably practicable thereafter and continuing for five years from the petition date, in an aggregate amount equal to the allowed claim, together with interest at the applicable rate under non-bankruptcy law, subject to the option of the reorganized debtors to prepay the entire amount of the allowed claim during such time period.
- Class 4 - Term loan claims: Except to the extent that a holder agrees to less favorable treatment, either (i) if an entity other than the term loan lenders is the winning bidder, its pro rata share of the term loan distributable cash up to the full amount of the holder’s allowed claim or such other treatment rendering the holder’s allowed claim unimpaired or (ii) if the term loan lenders are the winning bidder, its pro rata share of 23% of the New Interests outstanding on the effective date, subject to dilution for the management incentive plan.
- Class 5 - General unsecured claims: Except to the extent that a holder agrees to less favorable treatment, either (i) if an entity other than the term loan lenders is the winning bidder, its pro rata share of the excess distributable cash up to the full amount of the holder’s allowed claim, or (ii) if the term loan lenders are the winning bidder, “its Pro Rata share of [●], in full and final satisfaction, compromise, settlement, release, and discharge of and in exchange” for the allowed claim.
- Class 6 - Hollander Canada general unsecured claims: Except to the extent that a holder agrees to less favorable treatment, pro rata share of the “Hollander Canada Cash Allocation Distribution” - which is defined as, (i) if the winning bidder is not the term loan lenders, any cash proceeds of a sale transaction, after payment in full of the DIP ABL claims, allocated to the assets, properties, and undertakings of Hollander Canada by the winning bidder, or (ii) if the winning bidder is the term loan lenders, the cash proceeds, if any, of any Canadian acquisition transaction, if so elected by the term loan lenders, made available to apply against the Hollander Canada general unsecured claims - up to the full amount.
- Class 7 - Intercompany claims: At the option of the debtors, in consultation with the term loan agent and the “Required Term Lenders” - which is defined as the consenting term loan lenders holding in the aggregate at least 66.67% in principal amount outstanding of all term loan claims held by consenting term loan lenders - either (i) reinstated, or (ii) cancelled.
- Class 8 - Intercompany interests: At the option of the debtors, in consultation with the term loan agent and the “Required Term Lenders”, either (i) reinstated in accordance with article III.G of the plan, or (ii) cancelled and released.
- Article III.G of the plan states: “To the extent Reinstated under the Plan, distributions on account of Intercompany Interests are not being received by Holders of such Intercompany Interests on account of their Intercompany Interests but for the purposes of administrative convenience, for the ultimate benefit of the Holders of the New Interests, and in exchange for the Debtors’ and Reorganized Debtors’ agreement under the Plan to provide management services to certain other Debtors and Reorganized Debtors, to use certain funds and assets as set forth in the Plan to make certain distributions and satisfy certain obligations of certain other Debtors and Reorganized Debtors to the Holders of certain Allowed Claims. For the avoidance of doubt, any Interest in non-Debtor subsidiaries owned by a Debtor shall continue to be owned by the applicable Reorganized Debtor."
- Class 9 - Interests in Dream II: Cancelled, released and extinguished.
- Class 10 - Section 510(b) claims: discharged, cancelled, released and extinguished.
The plan contemplates two “Exit Facilities”: an exit ABL facility (in an unspecified amount) and a $58 million exit term facility. The exact terms of the exit ABL facility are not specified. However, the plan does provide that each holder of an allowed DIP ABL claim would receive either payment in full or, “at such Holder’s election and agreement by the Debtors,” a pro rata share of the exit ABL facility. Further, the plan provides that if the term loan lenders are the winning bidder for the debtors’ assets, each holder of a last out DIP loan claim (or existing last out loan claim) would receive a pro rata share of the exit ABL facility on a last out basis.
According to the plan, the exit term facility would consist of a $28 million exit term loan facility provided by the DIP term loan lenders in consideration of the DIP term loan claims, and a $30 million new money exit term loan facility provided under the exit term loan credit agreement. The debtors indicate that they would use the proceeds “to fund ongoing operations and distributions under the Plan and to satisfy other Cash obligations under the Plan. The plan further provides that if the term loan lenders are the winning bidder for the debtors’ assets, then
Under the plan, if the term lenders are the winning bidder for the debtors’ assets, then each exit loan lender, “in exchange for the commitment to fund the Exit Term Loan Facility,” would receive “its Pro Rata share of 40 percent of the New Interests outstanding on the Effective Date, subject to dilution for the Management Incentive Plan, and such other consideration as set forth in the Exit Facility Documents” (emphasis added).
The plan provides that terms for the exit facilities “will be determined in accordance with the Reorganized Debtors’ contemplated post-Effective Date business plan following and depending on the results of the Auction (which may contemplate the continued ownership or operation of all or only some of the Debtors’ assets), and any documentation necessary to implement the Exit Facilities will be included in the Plan Supplement.”
Other Plan Provisions
The plan includes typical debtor and third party releases in favor of the debtors, prepetition agent and secured lenders, DIP agent and lenders, exit facility agent and lenders, the sponsor, RSA parties, and their respective affiliates, officers, directors and advisors. The plan’s release provisions are bracketed, and the debtors note that they are “subject to the satisfactory completion of a review of such releases and any investigation by the Debtors’ independent director into any potential claims and Causes of Action subject to such releases.”
The plan also includes typical exculpation provisions in favor of the debtors, any committees, the DIP agent and lenders, the ABL agent and lenders, the term loan agent and lenders, the exit facility agent and lenders, the sponsor, and the RSA parties and their respective affiliates, officers, directors and advisors.
Further, the plan contemplates assumption of all executory contracts not specifically rejected, including all employee wages, compensation, and benefit programs and collective bargaining agreements.
Bid Procedures / Sale Timeline
Through the bid procedures motion, the debtors are seeking to run their proposed plan and sale marketing processes “in parallel.” The motion describes the plan’s sale toggle feature as “authority to market test the transaction contemplated by the RSA and the Plan to ensure the Debtors obtain the highest or otherwise best offer, or combination of offers, for the Debtors’ assets.” The motion proposes a preliminary bid deadline of July 1, final bid deadline of July 26 and auction date of August 1. If no qualified bids are received by the bid deadline, the motion says that “the Term Loan Lenders will be deemed the Winning Bidder, and the Debtors will pursue entry of an order by the Bankruptcy Court confirming the Plan at the Confirmation Hearing.”
The debtors are also seeking authority to select one or more parties to act as a stalking horse bidder and to pay “customary” bid protections in the form of a breakup fee, expense reimbursement and/or work fee in an aggregate amount up to three percent of any proposed purchase price.
The proposed timeline for the sale and related plan process is as follows:
DIP Financing Motion
The debtors request approval of (a) a $90 million senior secured DIP ABL facility on a superpriority basis provided by the prepetition ABL lenders, with Wells Fargo Bank as agent and (b) a $28 million new-money DIP term loan facility for the debtors (other than debtor Hollander Sleep Products Canada Limited) on a senior secured and superpriority basis, provided by certain prepetition term loan lenders with Barings Finance as agent. The DIP ABL credit agreement provides for the refinancing of the prepetition ABL obligations upon entry of the interim order. “The Prepetition ABL Lenders are highly unlikely to continue to lend postpetition without the roll-up of the Prepetition ABL Obligations, given the concerns raised by the Prepetition ABL Lenders with respect to the coverage of their loans under the Debtors’ borrowing base and tight liquidity,” the debtors assert.
The debtors stress that the proposed DIP facilities show the lenders’ support for the proposed plan process because the term lenders have agreed to the RSA by which they would either own the reorganized business or be paid cash from a sale process, and in “either event they will support the Debtors’ exit through a chapter 11 plan and the payment of administrative expense and priority claims.”
In support of the proposed DIP financing, the debtors filed the declaration of Saul Burian of Houlihan Lokey, who states that the debtors need access to funding “imminently to ensure their ongoing viability,” adding that the postpetition financing, Burian believes, “will send a strong message to the Debtors’ key stakeholders that operations are and will continue to be adequately funded throughout the cases and that the Debtors have funding for a path to emergence.” Burian also says that the term loan lenders have “stepped up” by agreeing to roll the $28 million DIP term loan into an exit facility and to backstop an additional $30 million new money commitment, for a total exit facility of $58 million.
DIP ABL Facility
The DIP ABL facility bears interest at the “Base Rate” plus 2% or LIBOR + 4%, with 2% added for the default rate, and matures on the earliest of 150 days after the petition date, if a final order has not yet been entered within 40 days of the first day hearing and other customary events.
To secure the DIP ABL, the debtors propose to grant liens on substantially all assets of the “DIP ABL Loan Parties,” which includes all seven debtor entities. The debtors also propose a lien on proceeds of avoidance actions, subject to entry of the final order.
The company proposes adequate protection for the prepetition ABL parties in the form of replacement liens, payment of cash interest at the default rate (“other than on account of Last Out Loans and Last Out Obligations, provided that the Last Out Loans and Last Out Obligations shall accrue interest at the default rate as part of the Last Out Loans and Last Out Obligations”), principal due under the prepetition ABL documents (except for on account of Last Out Loans and Last Out Obligations) and fees and expenses under the DIP ABL credit agreement.
The DIP ABL would refinance the company’s prepetition ABL obligations via a “creeping” roll-up until entry of the final order, at which point all outstanding prepetition ABL borrowings would be deemed obligations under the DIP ABL facility.
DIP Term Loan Facility
The DIP term loan facility bears interest at the “Base Rate” plus 6% or LIBOR + 7%, with an additional 2% for the default rate of interest. The term loan facility matures on the same schedule as the ABL facility.
To secure the DIP term loan, the debtors propose to grant liens on substantially all assets of the “DIP Term Loan Parties,” which includes “all debtors, excluding ... Hollander Sleep Products Canada Limited.” Like the DIP ABL, the debtors also propose a lien on proceeds of avoidance actions, subject to entry of the final order.
The debtors propose adequate protection for the prepetition term loan parties in the form of replacement liens. Both the priority of the adequate protection liens and the adequate protection reservation are the same as the DIP ABL facility.
The DIP term loan provides that the lenders may be repaid “in the form of senior secured debt and equity in the reorganized Loan Parties on the Plan Effective Date of a confirmed Plan if a Plan as contemplated by the RSA is confirmed.”
In addition, 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), both subject to entry of a final order.
The aggregate carveout for professional fees is $1.25 million.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
DIP Milestones
Both DIP loans are subject to the following milestones:
- Interim DIP order: entered within two business days after the first day hearing
- Canadian initial recognition order/Canadian interim DIP recognition order/Canadian supplemental order: entered within three business days after entry of the interim DIP order
- Bid procedures motion: filed within seven days of petition date (and Canadian court to enter order recognizing the bid procedures within three business days following entry of bid procedures order)
- Final DIP order: entered within 40 days after first day hearing (and Canadian court to enter Canadian final DIP recognition order within three business days thereafter)
- Disclosure statement: filed within 40 days after petition date, but in any event non later than entry of final DIP order
- Bid procedures order: entered within 45 days after the petition date
- DS order: entered within 110 days after petition date (and within three business days thereafter the Canadian court must issue an order recognizing such order)
- Plan confirmation order: entered within 110 days after petition date (and within three business days thereafter the Canadian court must issue an order recognizing such order)
- Plan effective date: within 120 days after petition date
The lien challenge deadline for both facilities is 75 days after entry of the Final DIP order if no official creditors’ committee is formed, and if a committee is formed, 60 days after entry of the final order.
The debtors seek approval of a closing fee, unused revolver fee and letter of credit fee under the DIP ABL facility, and a commitment fee, backstop fee, DIP term loan agent fee, unused commitment fee and exit fee under the DIP term loan facility. The debtors have sought to seal the DIP fee letters. The debtors also filed a motion seeking to enter into an exit backstop commitment letter and fee letter, as well as a related motion to seal.
Surety Motion
The debtors filed a motion seeking to continue and renew their surety bond program. In the ordinary course of business, the motion states, certain statutes, rules, and regulations require that the debtors provide surety bonds to certain third parties - often to governmental units or other public agencies - to secure the debtors’ payment or performance of certain obligations, including custom liabilities. Without the surety bond program, the debtors say, Hollander would not be able to continue importing products across U.S. borders. A table summarizing the surety bonds currently maintained by the debtors is as follows:
Motion to Authorize Foreign Representative
Hollander seeks authorization for Hollander to act as the foreign representative in the Canadian proceeding.
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. 19-11608.
- Motion to Pay Critical Vendors, Lien Claimants, 503(b)(9) Claimants, & Foreign Vendors
- The debtors seek to pay vendor claims in the aggregate amount of up to $4 million on an interim basis and up to $6 million on a final basis.
- Motion to Pay Employee Wages and Benefits
- The debtors request authority to pay up to $5.6 million in employee obligations on an interim basis and up to $6.31 million on a final basis.
- Motion to Use Cash Management System
- The company has bank accounts with Wells Fargo and Royal Bank of Canada.
- Motion to Honor Customer Programs
- Motion to Maintain Insurance Programs
- Motion to Pay Taxes and Fees
- The debtors owe approximately $679,000 in taxes and fees, of which $421,000 are due within 25 days of the petition date.
- Motion to Extend the Deadline for Filing Schedules and Statements to July 2
- Motion to File Consolidated Lists of Creditors
- Motion to Provide Utilities with Adequate Assurance
- Application to Appoint Omni Management Group as Claims Agent
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