Lucky Brand Dungarees, LLC
CASE SUMMARY: Lucky Brand Enters Chapter 11 With All Assets Stalking Horse Bid from SPARC Group, ‘Back-Up’ IP Bid From Authentic Brands Group Affiliate; $15.6M Junior DIP Financing from 2L Lenders
Mon 07/06/2020 12:57 PM
Relevant Documents:
Voluntary Petition
Press Release
First Day Declaration
DIP Financing Motion
Bid Procedures Motion
First Day Hearing Agenda
Lucky Brand Dungarees, a Los Angeles-based “apparel lifestyle brand” that designs, markets, sells, distributes and licenses a collection of contemporary premium fashion apparel under the Lucky Brand name, filed for chapter 11 protection on Saturday in the Bankruptcy Court for the District of Delaware. The debtors seek “to pursue a value-maximizing sale for the benefit of the Debtors’ stakeholders and to facilitate the orderly winding up of their estates through confirmation of a chapter 11 liquidating plan.” The debtors have reached a “global deal” on stalking horse purchase agreements and DIP financing to “preserve the going-concern value of the Debtors’ iconic American denim and apparel business.” The debtors have entered into a going concern stalking horse purchase agreement with SPARC Group LLC for the sale of substantially all of the company’s operating assets, as well as a “back-up” asset purchase agreement for intellectual property and other assets, with ABG-Lucky LLC, a newly formed subsidiary of Authentic Brands Group, to the extent that the all assets purchase agreement is terminated. As part of an “integrated package deal,” the second lien lenders have also agreed to provide $15.6 million in junior DIP financing. The debtors say that the sale process “is intended to pay the obligations of the First Lien Lenders in full.”
The first day hearing has been scheduled for today, July 6, at 2 p.m. ET. The case docket can be found on Reorg HERE.
As part of the all assets agreement, “SPARC has agreed to designate certain assets to the following parties (or their respective designees), in exchange for payment of a portion of the purchase price thereunder: (i) Authentic Brands Group, LLC (‘ABG’), (ii) each of the DIP Lenders [ ], and (iii) each of the Second Lien Lenders.” The all assets bid is contingent on SPARC’s ability to obtain financing for the purchase of inventory by July 27, without which the sale would toggle to a sale of the debtors’ intellectual property, and “in such event, the Company will sell and/or liquidate its remaining assets in the manner that best maximizes value to the Debtors’ estates under the circumstances.”
The all assets bid includes “cash in the amount of $140,100,000, the Specified Trade Receivables Adjustment (as defined in the All Assets Purchase Agreement), an aggregate credit bid equivalent to approximately $51,500,000, plus other consideration; the IP Bid has a purchase price of $90,000,000, plus the option to purchase inventory related to the ecommerce and wholesale business (with retail inventory, accounts receivable, and other remaining assets to be sold or otherwise liquidated) plus other consideration.”
The debtors’ prepetition capital structure includes:
The debtors are obligated to the first lien term lenders with respect to a prepayment fee of approximately $1.5 million that is fully earned and due and payable in full. Nonetheless, the proposed interim DIP order provides that the first lien term lenders have agreed that only 50% of the prepayment fee would be capitalized and added to principal balance of the first lien term loan facility and the balance of the fee would be waived if the first lien obligations are paid in full by a certain date.
In addition, the debtors have approximately $79 million in merchandise trade debt, of which $2.3 million would be entitled to administrative expense priority for goods provided to the debtors in the 20 days prior to the petition date under Bankruptcy Code section 503(b)(9). In addition, the debtors operate exclusively in leased facilities and maintain over 219 real property leases, for which they estimate that they will accrue approximately $52 million in lease and occupancy related expenses in fiscal year 2020 (approximately $4.3 million per month).
The debtors say that they are electing to take available relief under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, including deferral of payment of certain payroll taxes and customs and import duties. The company states that it continues “to evaluate the provisions of the CARES Act and the ways in which the CARES Act could assist the Company’s business or improve its liquidity.”
Leonard Green & Partners owns a minority interest in ABG. The second lien lenders consist of the lenders under the company’s second lien term loan A credit agreement and the second lien term loan B credit agreement. Lucky Holdings JV, LLC, a joint venture entity whose two members consist of an affiliate of each of Hilco Merchant Resources LLC and Lantern Capital Partners, is the lender under the second lien term loan A credit agreement and Clover Holdings II, LLC (an affiliate of funds managed by Leonard Green & Partners, and the current majority equityholder of debtor LBD Parent Holdings, LLC), is the lender under the second lien term loan B credit agreement.
Clover Holdings II, LLC purchased Lucky Brand in 2015. As of the petition date, Clover Holdings holds approximately 89.9%, Carlos Alberini holds approximately 9.8% and the Krevlin 2005 Gift Trust holds approximately 0.3% of LBD Parent Holdings, LLC’s preferred units. Also as of the petition date, Clover Holdings holds approximately 75% and Carlos Alberini holds approximately 13.5% of the class A common units, with the remainder held by various other holders. The second lien lenders, including Clover Holdings, hold warrants in LBD Parent Holdings.
According to the first day declaration, “ABG is a brand development, marketing, and entertainment company and SPARC is a leading apparel company operating under the Aeropostale and Nautica brands owned by ABG and Simon Property Group, which is one of the Company’s key landlords.” Due to “active engagement by both ABG and SPARC in the November 2019 Refinancing transaction and the 2019 Marketing Process and these parties’ considerable retail market and industry knowledge, these parties, working with the Second Lien Lenders, were in a position to move quickly to provide a stalking horse bid that will set the baseline for an expedited sale process.”
With approximately $16.13 million of cash on hand, the debtors request DIP financing in the amount of $15.6 million from Lantern Capital Partners Clover Holdings II, LLC, and ReStore Capital, LLC, an affiliate of Hilco, with Lantern Capital Partners as “acting as administrative and collateral agent under the Junior DIP Facility.” Given the company’s challenges, liquidity constraints and that it burns a “significant” amount of cash in operating, “the Company’s DIP Lenders were only willing to provide limited postpetition financing in the form of use of Cash Collateral and the Junior DIP Facility to run an expedited sale process.” The debtors say that the “received only one DIP financing proposal (the proposal from the Second Lien Lenders).”
The proposed DIP financing received an objection from unsecured creditor Hirdaramani Group and Hirdaramani International Exports (PVT)LT, which is the second largest unsecured creditor with a $5.9 million claim. Hirdaramani asserts that these cases “resemble a foreclosure sale whereby the First Lienholder Claims will be paid one way or another and the insiders in the Second Lien Position have a chance to rid the Debtors of the indebtedness against them including $78 Million of trade debt and get a release personally for their trouble” and requests that the motion be continued to the week of July 13 after appointment of an official committee of unsecured creditors.
The debtors also seek to close 13 initial stores, with Gordon Brothers Retail Partners to conduct store closing sales.
The company says that its prepetition restructuring efforts were “derailed by a combination of the economic impact of the global COVID-19 pandemic, which resulted in extended closures of its retail stores, and limited liquidity, which diminished access to new inventory from its vendors.” Store closures due to the pandemic have “only exacerbated the Company’s issues related to its substantial funded debt obligations, significant lease obligations, and trade indebtedness.”
Separate from the pandemic-related challenges faced by the debtors, Lucky’s performance in recent years has been hindered by several factors, including the general shift away from brick-and-mortar stores to online channels and the accompanying departure of anchor mall tenants, a highly promotional and competitive retail environment and a shift in customer demand away from apparel to technology and personal experiences, the first day declaration says.
The debtors are represented by Latham & Watkins and Young Conaway as counsel, Berkeley Research Group as restructuring advisor and Houlihan Lokey as investment banker. Mark Renzi is the CRO. Epiq is the claims agent. The case has been assigned to Judge Christopher S. Sontchi (case number 20-11768).
Background
Lucky Brand, founded in 1990, is an “apparel brand with a deep heritage in California, music, moto, and Americana” that designs, manufactures, sells, distributes and licenses apparel for women, men and children, including denim jeans, pants, woven and knit tops, outerwear and accessories. In 1999, the company was acquired by Liz Claiborne, and Lucky Brand products were sold through 12 company-owned stores and select specialty retailers. Over the next two decades, Lucky expanded to over 220 company-owned stores in the United States, Canada, and Puerto Rico and developed a global e-commerce footprint. Before pandemic-related furloughs that began on March 29, Lucky had approximately 3,029 employees in the United States and Canada. As of the petition date, the debtors say that they have been able to return approximately 905 furloughed employees.
As of May, the debtors operated 112 specialty retail stores and 98 outlet stores in North America. The debtors’ store locations are all leased and are typically located in traditional shopping malls. The annual cost of the leases (rent and occupancy costs) for the debtors’ stores was approximately $66 million in fiscal year 2019. The debtors also lease the office space for their corporate headquarters in Los Angeles, California and for an office in New York, New York, as well as showrooms in Los Angeles and New York. The debtors also maintain distribution facilities in California and Kentucky.
The product categories of apparel, denim and accessories/other products make up 47%, 40% and 13%, respectively, of the debtors’ sales. The company’s e-commerce platform accounts for approximately 12% of all sales for the fiscal year ended Dec. 31, 2019. The company’s wholesale business, which makes up 46% of annual net sales, includes distribution to specialty stores, outlets and larger retailers such as department stores and hinges on relationships with “leading nationwide premium department stores, specialty retailers and boutiques, and off-price retailers through which its products are sold, including Macy’s, Dillard’s, Bloomingdale’s, Costco Wholesale, Nordstrom, TJ Maxx, and e-commerce retailers such as Zappos.com, Amazon.com, and others.”
In addition to its consumer sales and wholesale business, Lucky selectively provides licenses to third parties to use the company’s trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods. These agreements are generally structured with a guaranteed minimum payment that the licensee pays to the debtors, royalty income paid as a percentage of inventory purchases or sales above agreed upon thresholds, and a fee based on percentage of sales to compensate the debtors for their advertising costs. For the fiscal year ended Dec, 31, 2019, the company recognized approximately $14 million in licensing royalty revenue.
Nearly all of the debtors’ merchandise is sourced either by purchasing directly from manufacturing vendors or through the use of vendor service providers. The “substantial majority” of the vendors and service providers utilized by the debtors is based outside of the U.S. In fiscal year 2019, the debtors purchased “nearly all” of their inventory from suppliers located outside of the U.S. The debtors have historically done business with over 75 vendors that operate hundreds of factories, with the top 10 vendors supplying 65% of the debtors’ merchandise. Lucky sources the balance of its merchandise through vendor service providers Li & Fung (Trading) Limited and Newtimes Overseas Limited, which assist in identifying suitable vendors, placing orders for merchandise on the debtors’ behalf, managing timely delivery of goods, inspecting the finished merchandise and handling vendor communications.
In 2019, the debtors operated nine stores in Canada through Lucky Brand Dungarees Canada, Inc. In spring 2020, the company decided to halt operations in Canada and permanently close all of its Canadian stores. Lucky Canada commenced liquidation proceedings in Canada. The debtors say that they expect all proceeds from the liquidation of Lucky Canada will be used to pay Lucky Canada’s creditors and do not presently anticipate that there will be recoveries in excess of Lucky Canada’s obligations.
Leonard Green & Partners acquired the Lucky Brand business from Kate Spade & Company in February 2014. Subsequently, the company underwent various refinancings in 2015 and 2016, and finally, in November 2019 that resulted in the current capital structure.
The company’s corporate organizational structure follows:
The debtors' largest unsecured creditors are listed below:
The case representatives are as follows:
DIP Financing Motion
The debtors request approval of DIP financing of $15.6 million consisting of a junior secured term loan facility, including a $4.1 million sublimit for the issuance of letters of credit, with Lantern Capital Partners as agent and lender, and ReStore Capital, LLC and Clover Holdings II, LLC as additional lenders. On an interim basis, the debtors seek $6.5 million of availability and $4.1 million to be solely used for the issuance of letters of credit.
The DIP commitments, as listed in schedules attached to the DIP note, are as follows:
“Although members of the Stalking Horse Parties and the DIP Lenders have prepetition connections to the Debtors,” the DIP motion says that the approval of the stalking horse agreements and DIP financing was within the sole discretion of a special committee of the board and the independent director.
“During the sale process and following the closing of the sale transaction, the Debtors intend to move quickly to confirmation of a chapter 11 plan, which will, subject to the approved Wind-Down Budget [ ], distribute the proceeds of the going-concern sale and other asset dispositions to creditors in accordance with the priority of their claims,” according to the DIP motion.
The DIP financing bears interest at 17%, with 3% added for the default rate, and matures on the earliest of (a) three months after the petition date if the toggle does not occur, or if the toggle occurs, Oct. 31, (b) the 363 sale effective date, (c) the date on which a sale of a “material portion” of the intellectual property is consummated pursuant to a 363 sale or otherwise (other than in connection with the occurrence of the toggle) and (d) the date on which the DIP financing is accelerated. The DIP termination date is the earliest of Aug. 30 unless the first lien obligations have been paid in full in cash, 30 days after the petition date unless a final order has been entered and the fifth business day after written notice of a termination event.
To secure the DIP financing, the debtors propose to grant liens “(i) junior to the First Liens [ ] and any other valid, perfected, and non-avoidable liens in existence immediately prior to the Petition Date (other than liens on the Second Lien Collateral) and to any valid and non-avoidable liens in existence immediately prior to the Petition Date that are perfected subsequent to the Petition Date as permitted by section 546(b) of the Bankruptcy Code, in each case, that are senior to the First Liens; (ii) junior to the Prepetition Senior Adequate Protection Liens [ ]; (iii) senior to the Second Liens [ ]; and (iv) senior to the Prepetition Junior Adequate Protection Liens." The debtors propose a lien on avoidance action proceeds subject to the final order. "Although the Junior DIP Facility consensually primes the Second Lien Lenders’ prepetition liens in the Prepetition Collateral, it does not seek to prime the First Lien Lenders’ prepetition liens in the Prepetition Collateral.”
The facility includes various fees, including a 1% upfront fee, and letters of credit fees of 0.125% of the face amount of each letter of credit plus $305, plus a weekly administration fee of $150,000 fee to the first lien agent (subject to reduction to $100,000 under certain circumstances).
In support of the proposed DIP financing, the debtors attached to the motion the declaration of Eric Winthrop, managing director at Houlihan Lokey, who states that the DIP financing interest rate is “equivalent to that of the prepetition Second Lien credit Facility including default interest.”
“The Debtors are entering chapter 11 with limited cash on hand, and the Prepetition Lenders’ (in particular the First Lien Lenders’) consent to the use of cash collateral is conditioned upon the DIP Financing and the transactions contemplated in the Stalking Horse Agreements,” the debtors stress. The company proposes the following adequate protection to its first lien lenders: cash payment of unused commitment fees, letter of credit fees and interest at the default rate, replacement liens, superpriority administrative expense claims and payment of professional fees of the first lien agent. The second lien lenders would be entitled to cash payment of fees and expenses under the second lien term A credit agreement or second lien term loan B credit agreement, replacement liens and superpriority administrative expense claims.
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 $1 million.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
The lien challenge deadline is 75 days from entry of the interim DIP order for any party other than an official unsecured creditors’ committee, which would have 60 days from formation. The UCC investigation budget is $50,000.
Bid Procedures Motion
The debtors seek approval of bid procedures for the sale of their assets. The debtors ran a 2019 marketing process, through which ABG and SPARC executed confidentiality agreements, but the debtors determined to pursue a refinancing instead. In May 2020 the debtors again engaged Houlihan to run a sale process, including an initial outreach on May 27, a second outreach on June 9 and a third on June 15, and the debtors say that they are continuing the process of signing up additional confidentiality agreements and that the process will continue in chapter 11.
The debtors entered into the stalking horse agreements on July 3. The agreements do not require overbids. The debtors propose a breakup fee of $6.2 million under the all assets purchase agreement and $2.7 million under the IP purchase agreement and reimbursement of up to $1 million in expenses. “In no event shall the Stalking Horse Protections be paid to more than one Stalking Horse Bidder,” the debtors clarify.
The all assets purchase agreement seeks to permit the DIP lenders to credit bid in an amount equal to $11.5 million and the second lien lenders to credit bid in amount equal to $50 million.
In support of the motion, the debtors filed the declaration of Eric Winthrop, a managing director at Houlihan Lokey, who says that “While a portion of the consideration for the Acquired Assets under the All Assets Purchase Agreement will be in the form of a credit bid by the Second Lien Lenders and the DIP Lenders, I believe that the bid protections are nevertheless reasonable given (i) the substantial cash consideration being paid in connection with the proposed transaction and (ii) the global deal surrounding both the Stalking Horse Purchase Agreements and the corresponding DIP Financing whereby the Second Lien Lenders, as DIP Lenders, are providing the Debtors with an additional $15,600,000 of liquidity.”
The debtors propose the following sale timeline:
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
Press Release
First Day Declaration
DIP Financing Motion
Bid Procedures Motion
First Day Hearing Agenda
| Summary |
| Lucky Brand Dungarees designs, manufactures, sells, distributes and licenses contemporary premium fashion apparel under the Lucky Brand name |
| Reached “global deal” on stalking horse agreements, $15.6M in DIP financing from second lien lenders |
| SPARC Group LLC is stalking horse for substantially all of the company’s operating assets, and subsidiary of Authentic Brands group is party to “back-up” asset purchase agreement for IP and other assets |
Lucky Brand Dungarees, a Los Angeles-based “apparel lifestyle brand” that designs, markets, sells, distributes and licenses a collection of contemporary premium fashion apparel under the Lucky Brand name, filed for chapter 11 protection on Saturday in the Bankruptcy Court for the District of Delaware. The debtors seek “to pursue a value-maximizing sale for the benefit of the Debtors’ stakeholders and to facilitate the orderly winding up of their estates through confirmation of a chapter 11 liquidating plan.” The debtors have reached a “global deal” on stalking horse purchase agreements and DIP financing to “preserve the going-concern value of the Debtors’ iconic American denim and apparel business.” The debtors have entered into a going concern stalking horse purchase agreement with SPARC Group LLC for the sale of substantially all of the company’s operating assets, as well as a “back-up” asset purchase agreement for intellectual property and other assets, with ABG-Lucky LLC, a newly formed subsidiary of Authentic Brands Group, to the extent that the all assets purchase agreement is terminated. As part of an “integrated package deal,” the second lien lenders have also agreed to provide $15.6 million in junior DIP financing. The debtors say that the sale process “is intended to pay the obligations of the First Lien Lenders in full.”
The first day hearing has been scheduled for today, July 6, at 2 p.m. ET. The case docket can be found on Reorg HERE.
As part of the all assets agreement, “SPARC has agreed to designate certain assets to the following parties (or their respective designees), in exchange for payment of a portion of the purchase price thereunder: (i) Authentic Brands Group, LLC (‘ABG’), (ii) each of the DIP Lenders [ ], and (iii) each of the Second Lien Lenders.” The all assets bid is contingent on SPARC’s ability to obtain financing for the purchase of inventory by July 27, without which the sale would toggle to a sale of the debtors’ intellectual property, and “in such event, the Company will sell and/or liquidate its remaining assets in the manner that best maximizes value to the Debtors’ estates under the circumstances.”
The all assets bid includes “cash in the amount of $140,100,000, the Specified Trade Receivables Adjustment (as defined in the All Assets Purchase Agreement), an aggregate credit bid equivalent to approximately $51,500,000, plus other consideration; the IP Bid has a purchase price of $90,000,000, plus the option to purchase inventory related to the ecommerce and wholesale business (with retail inventory, accounts receivable, and other remaining assets to be sold or otherwise liquidated) plus other consideration.”
The debtors’ prepetition capital structure includes:
The debtors are obligated to the first lien term lenders with respect to a prepayment fee of approximately $1.5 million that is fully earned and due and payable in full. Nonetheless, the proposed interim DIP order provides that the first lien term lenders have agreed that only 50% of the prepayment fee would be capitalized and added to principal balance of the first lien term loan facility and the balance of the fee would be waived if the first lien obligations are paid in full by a certain date.
In addition, the debtors have approximately $79 million in merchandise trade debt, of which $2.3 million would be entitled to administrative expense priority for goods provided to the debtors in the 20 days prior to the petition date under Bankruptcy Code section 503(b)(9). In addition, the debtors operate exclusively in leased facilities and maintain over 219 real property leases, for which they estimate that they will accrue approximately $52 million in lease and occupancy related expenses in fiscal year 2020 (approximately $4.3 million per month).
The debtors say that they are electing to take available relief under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, including deferral of payment of certain payroll taxes and customs and import duties. The company states that it continues “to evaluate the provisions of the CARES Act and the ways in which the CARES Act could assist the Company’s business or improve its liquidity.”
Leonard Green & Partners owns a minority interest in ABG. The second lien lenders consist of the lenders under the company’s second lien term loan A credit agreement and the second lien term loan B credit agreement. Lucky Holdings JV, LLC, a joint venture entity whose two members consist of an affiliate of each of Hilco Merchant Resources LLC and Lantern Capital Partners, is the lender under the second lien term loan A credit agreement and Clover Holdings II, LLC (an affiliate of funds managed by Leonard Green & Partners, and the current majority equityholder of debtor LBD Parent Holdings, LLC), is the lender under the second lien term loan B credit agreement.
Clover Holdings II, LLC purchased Lucky Brand in 2015. As of the petition date, Clover Holdings holds approximately 89.9%, Carlos Alberini holds approximately 9.8% and the Krevlin 2005 Gift Trust holds approximately 0.3% of LBD Parent Holdings, LLC’s preferred units. Also as of the petition date, Clover Holdings holds approximately 75% and Carlos Alberini holds approximately 13.5% of the class A common units, with the remainder held by various other holders. The second lien lenders, including Clover Holdings, hold warrants in LBD Parent Holdings.
According to the first day declaration, “ABG is a brand development, marketing, and entertainment company and SPARC is a leading apparel company operating under the Aeropostale and Nautica brands owned by ABG and Simon Property Group, which is one of the Company’s key landlords.” Due to “active engagement by both ABG and SPARC in the November 2019 Refinancing transaction and the 2019 Marketing Process and these parties’ considerable retail market and industry knowledge, these parties, working with the Second Lien Lenders, were in a position to move quickly to provide a stalking horse bid that will set the baseline for an expedited sale process.”
With approximately $16.13 million of cash on hand, the debtors request DIP financing in the amount of $15.6 million from Lantern Capital Partners Clover Holdings II, LLC, and ReStore Capital, LLC, an affiliate of Hilco, with Lantern Capital Partners as “acting as administrative and collateral agent under the Junior DIP Facility.” Given the company’s challenges, liquidity constraints and that it burns a “significant” amount of cash in operating, “the Company’s DIP Lenders were only willing to provide limited postpetition financing in the form of use of Cash Collateral and the Junior DIP Facility to run an expedited sale process.” The debtors say that the “received only one DIP financing proposal (the proposal from the Second Lien Lenders).”
The proposed DIP financing received an objection from unsecured creditor Hirdaramani Group and Hirdaramani International Exports (PVT)LT, which is the second largest unsecured creditor with a $5.9 million claim. Hirdaramani asserts that these cases “resemble a foreclosure sale whereby the First Lienholder Claims will be paid one way or another and the insiders in the Second Lien Position have a chance to rid the Debtors of the indebtedness against them including $78 Million of trade debt and get a release personally for their trouble” and requests that the motion be continued to the week of July 13 after appointment of an official committee of unsecured creditors.
The debtors also seek to close 13 initial stores, with Gordon Brothers Retail Partners to conduct store closing sales.
The company says that its prepetition restructuring efforts were “derailed by a combination of the economic impact of the global COVID-19 pandemic, which resulted in extended closures of its retail stores, and limited liquidity, which diminished access to new inventory from its vendors.” Store closures due to the pandemic have “only exacerbated the Company’s issues related to its substantial funded debt obligations, significant lease obligations, and trade indebtedness.”
Separate from the pandemic-related challenges faced by the debtors, Lucky’s performance in recent years has been hindered by several factors, including the general shift away from brick-and-mortar stores to online channels and the accompanying departure of anchor mall tenants, a highly promotional and competitive retail environment and a shift in customer demand away from apparel to technology and personal experiences, the first day declaration says.
The debtors are represented by Latham & Watkins and Young Conaway as counsel, Berkeley Research Group as restructuring advisor and Houlihan Lokey as investment banker. Mark Renzi is the CRO. Epiq is the claims agent. The case has been assigned to Judge Christopher S. Sontchi (case number 20-11768).
Background
Lucky Brand, founded in 1990, is an “apparel brand with a deep heritage in California, music, moto, and Americana” that designs, manufactures, sells, distributes and licenses apparel for women, men and children, including denim jeans, pants, woven and knit tops, outerwear and accessories. In 1999, the company was acquired by Liz Claiborne, and Lucky Brand products were sold through 12 company-owned stores and select specialty retailers. Over the next two decades, Lucky expanded to over 220 company-owned stores in the United States, Canada, and Puerto Rico and developed a global e-commerce footprint. Before pandemic-related furloughs that began on March 29, Lucky had approximately 3,029 employees in the United States and Canada. As of the petition date, the debtors say that they have been able to return approximately 905 furloughed employees.
As of May, the debtors operated 112 specialty retail stores and 98 outlet stores in North America. The debtors’ store locations are all leased and are typically located in traditional shopping malls. The annual cost of the leases (rent and occupancy costs) for the debtors’ stores was approximately $66 million in fiscal year 2019. The debtors also lease the office space for their corporate headquarters in Los Angeles, California and for an office in New York, New York, as well as showrooms in Los Angeles and New York. The debtors also maintain distribution facilities in California and Kentucky.
The product categories of apparel, denim and accessories/other products make up 47%, 40% and 13%, respectively, of the debtors’ sales. The company’s e-commerce platform accounts for approximately 12% of all sales for the fiscal year ended Dec. 31, 2019. The company’s wholesale business, which makes up 46% of annual net sales, includes distribution to specialty stores, outlets and larger retailers such as department stores and hinges on relationships with “leading nationwide premium department stores, specialty retailers and boutiques, and off-price retailers through which its products are sold, including Macy’s, Dillard’s, Bloomingdale’s, Costco Wholesale, Nordstrom, TJ Maxx, and e-commerce retailers such as Zappos.com, Amazon.com, and others.”
In addition to its consumer sales and wholesale business, Lucky selectively provides licenses to third parties to use the company’s trademarks in connection with the manufacture and sale of designated products in specified geographical areas for specified periods. These agreements are generally structured with a guaranteed minimum payment that the licensee pays to the debtors, royalty income paid as a percentage of inventory purchases or sales above agreed upon thresholds, and a fee based on percentage of sales to compensate the debtors for their advertising costs. For the fiscal year ended Dec, 31, 2019, the company recognized approximately $14 million in licensing royalty revenue.
Nearly all of the debtors’ merchandise is sourced either by purchasing directly from manufacturing vendors or through the use of vendor service providers. The “substantial majority” of the vendors and service providers utilized by the debtors is based outside of the U.S. In fiscal year 2019, the debtors purchased “nearly all” of their inventory from suppliers located outside of the U.S. The debtors have historically done business with over 75 vendors that operate hundreds of factories, with the top 10 vendors supplying 65% of the debtors’ merchandise. Lucky sources the balance of its merchandise through vendor service providers Li & Fung (Trading) Limited and Newtimes Overseas Limited, which assist in identifying suitable vendors, placing orders for merchandise on the debtors’ behalf, managing timely delivery of goods, inspecting the finished merchandise and handling vendor communications.
In 2019, the debtors operated nine stores in Canada through Lucky Brand Dungarees Canada, Inc. In spring 2020, the company decided to halt operations in Canada and permanently close all of its Canadian stores. Lucky Canada commenced liquidation proceedings in Canada. The debtors say that they expect all proceeds from the liquidation of Lucky Canada will be used to pay Lucky Canada’s creditors and do not presently anticipate that there will be recoveries in excess of Lucky Canada’s obligations.
Leonard Green & Partners acquired the Lucky Brand business from Kate Spade & Company in February 2014. Subsequently, the company underwent various refinancings in 2015 and 2016, and finally, in November 2019 that resulted in the current capital structure.
The company’s corporate organizational structure follows:
The debtors' largest unsecured creditors are listed below:
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Claim Amount |
|---|---|---|---|
| Red & Blue International LTD | Anguilla | Vendor | $ 13,355,201 |
| Hirdaramani International Exports (PVT) LTD |
Sri Lanka | Vendor | 5,940,653 |
| Orit Trading Lanka (PVT) LTD | Sri Lanka | Vendor | 5,820,350 |
| INT, S.A. | Guatemala City | Vendor | 5,780,906 |
| Sahu Exports | Noida, India | Vendor | 4,703,140 |
| Simon | Indianapolis | Rent | 4,625,242 |
| SHree Bharat International PVT LTD |
Noida, India | Vendor | 3,545,209 |
| Shahi Exports Private Limited | Haryana, India | Vendor | 2,931,364 |
| Busana Apparel PTE LTD | Singapore | Vendor | 2,814,958 |
| Gaurav International | Haryana, India | Vendor | 2,771,453 |
The case representatives are as follows:
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel | George A. Davis | Latham & Watkins |
New York |
| Ted A. Dillman | Los Angeles | ||
| Lisa K. Lansio | |||
| Debtors' Co-Counsel | Michael R. Nestor | Young Conaway Stargatt & Taylor |
Wilmington, Del. |
| Kara Hammond Coyle | |||
| Andrew L. Magaziner | |||
| Joseph M. Mulvihill | |||
| Debtors' Restructuring Advisor |
Mark A. Renzi | Berkeley Research Group |
Boston |
| Debtors' Investment Banker |
Eric Winthrop | Houlihan Lokey |
Los Angeles |
| Counsel to Certain 2L Lenders, Certain DIP Lenders and the DIP Lender Representative |
Thomas Califano | DLA Piper |
New York |
| Daniel M. Simon | |||
| Co-Counsel to SPARC Group and Authentic Brands Group, as Stalking Horse Bidder |
Brian S. Hermann | Paul Weiss Rifkind Wharton & Garrison |
New York |
| Kelley A. Cornish | |||
| Edward T. Ackerman | |||
| Brian Bolin | |||
| Jeffrey L. Stricker | |||
| Co-Counsel to SPARC Group and Authentic Brands Group, as Stalking Horse Bidder |
Christopher M. Samis | Potter Anderson & Corroon |
Wilmington, Del. |
| L. Katherine Good | |||
| R. Stephen McNeill | |||
| Co-Counsel to the 1L Agent |
Kevin J. Simard | Choate Hall & Stewart |
Boston |
| Jennifer Conway Fenn | |||
| Saige Jutras Oftedal | |||
| Co-Counsel to the 1L Agent |
Kurt F. Gwynne | Reed Smith |
Wilmington, Del. |
| Jason D. Angelo | |||
| Counsel to the 1L Term Agent |
Jeffrey Wolfe | Greenberg Traurig |
Boston |
| Counsel to Hilco Merchant Resources |
Holly Snow | Paul Hastings |
Chicago |
| Counsel to Clover Holdings II |
Mark D. Collins | Richards Layton & Finger |
Wilmington, Del. |
| Michael J. Merchant | |||
| Brendan J. Schlauch | |||
| Counsel to the 2L Term Loan A Agent |
David A. Wender | Alston & Bird |
Atlanta |
| Antone J. Little | |||
| United States Trustee | Juliet M. Sarkessian | Office of the U.S. Trustee |
Wilmington, Del. |
| Debtors' Claims Agent | Kathryn Tran | Epiq | N/A |
DIP Financing Motion
The debtors request approval of DIP financing of $15.6 million consisting of a junior secured term loan facility, including a $4.1 million sublimit for the issuance of letters of credit, with Lantern Capital Partners as agent and lender, and ReStore Capital, LLC and Clover Holdings II, LLC as additional lenders. On an interim basis, the debtors seek $6.5 million of availability and $4.1 million to be solely used for the issuance of letters of credit.
The DIP commitments, as listed in schedules attached to the DIP note, are as follows:
“Although members of the Stalking Horse Parties and the DIP Lenders have prepetition connections to the Debtors,” the DIP motion says that the approval of the stalking horse agreements and DIP financing was within the sole discretion of a special committee of the board and the independent director.
“During the sale process and following the closing of the sale transaction, the Debtors intend to move quickly to confirmation of a chapter 11 plan, which will, subject to the approved Wind-Down Budget [ ], distribute the proceeds of the going-concern sale and other asset dispositions to creditors in accordance with the priority of their claims,” according to the DIP motion.
The DIP financing bears interest at 17%, with 3% added for the default rate, and matures on the earliest of (a) three months after the petition date if the toggle does not occur, or if the toggle occurs, Oct. 31, (b) the 363 sale effective date, (c) the date on which a sale of a “material portion” of the intellectual property is consummated pursuant to a 363 sale or otherwise (other than in connection with the occurrence of the toggle) and (d) the date on which the DIP financing is accelerated. The DIP termination date is the earliest of Aug. 30 unless the first lien obligations have been paid in full in cash, 30 days after the petition date unless a final order has been entered and the fifth business day after written notice of a termination event.
To secure the DIP financing, the debtors propose to grant liens “(i) junior to the First Liens [ ] and any other valid, perfected, and non-avoidable liens in existence immediately prior to the Petition Date (other than liens on the Second Lien Collateral) and to any valid and non-avoidable liens in existence immediately prior to the Petition Date that are perfected subsequent to the Petition Date as permitted by section 546(b) of the Bankruptcy Code, in each case, that are senior to the First Liens; (ii) junior to the Prepetition Senior Adequate Protection Liens [ ]; (iii) senior to the Second Liens [ ]; and (iv) senior to the Prepetition Junior Adequate Protection Liens." The debtors propose a lien on avoidance action proceeds subject to the final order. "Although the Junior DIP Facility consensually primes the Second Lien Lenders’ prepetition liens in the Prepetition Collateral, it does not seek to prime the First Lien Lenders’ prepetition liens in the Prepetition Collateral.”
The facility includes various fees, including a 1% upfront fee, and letters of credit fees of 0.125% of the face amount of each letter of credit plus $305, plus a weekly administration fee of $150,000 fee to the first lien agent (subject to reduction to $100,000 under certain circumstances).
In support of the proposed DIP financing, the debtors attached to the motion the declaration of Eric Winthrop, managing director at Houlihan Lokey, who states that the DIP financing interest rate is “equivalent to that of the prepetition Second Lien credit Facility including default interest.”
“The Debtors are entering chapter 11 with limited cash on hand, and the Prepetition Lenders’ (in particular the First Lien Lenders’) consent to the use of cash collateral is conditioned upon the DIP Financing and the transactions contemplated in the Stalking Horse Agreements,” the debtors stress. The company proposes the following adequate protection to its first lien lenders: cash payment of unused commitment fees, letter of credit fees and interest at the default rate, replacement liens, superpriority administrative expense claims and payment of professional fees of the first lien agent. The second lien lenders would be entitled to cash payment of fees and expenses under the second lien term A credit agreement or second lien term loan B credit agreement, replacement liens and superpriority administrative expense claims.
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 $1 million.
The proposed budget for the use of the DIP facility is HERE.
The DIP financing is subject to the following milestones:
The lien challenge deadline is 75 days from entry of the interim DIP order for any party other than an official unsecured creditors’ committee, which would have 60 days from formation. The UCC investigation budget is $50,000.
Bid Procedures Motion
The debtors seek approval of bid procedures for the sale of their assets. The debtors ran a 2019 marketing process, through which ABG and SPARC executed confidentiality agreements, but the debtors determined to pursue a refinancing instead. In May 2020 the debtors again engaged Houlihan to run a sale process, including an initial outreach on May 27, a second outreach on June 9 and a third on June 15, and the debtors say that they are continuing the process of signing up additional confidentiality agreements and that the process will continue in chapter 11.
The debtors entered into the stalking horse agreements on July 3. The agreements do not require overbids. The debtors propose a breakup fee of $6.2 million under the all assets purchase agreement and $2.7 million under the IP purchase agreement and reimbursement of up to $1 million in expenses. “In no event shall the Stalking Horse Protections be paid to more than one Stalking Horse Bidder,” the debtors clarify.
The all assets purchase agreement seeks to permit the DIP lenders to credit bid in an amount equal to $11.5 million and the second lien lenders to credit bid in amount equal to $50 million.
In support of the motion, the debtors filed the declaration of Eric Winthrop, a managing director at Houlihan Lokey, who says that “While a portion of the consideration for the Acquired Assets under the All Assets Purchase Agreement will be in the form of a credit bid by the Second Lien Lenders and the DIP Lenders, I believe that the bid protections are nevertheless reasonable given (i) the substantial cash consideration being paid in connection with the proposed transaction and (ii) the global deal surrounding both the Stalking Horse Purchase Agreements and the corresponding DIP Financing whereby the Second Lien Lenders, as DIP Lenders, are providing the Debtors with an additional $15,600,000 of liquidity.”
The debtors propose the following sale timeline:
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. 20-11768.
- Motion to pay critical vendors
- The debtors seek to pay up to $750,000 to critical vendors and foreign vendors on an interim basis, with up to $1 million in total payment sought on a final basis.
- Motion to pay shipping/warehousing/import claims
- The debtors request approval to pay up to approximately $1.1 million on account of shipping claims, up to $625,148 on account of warehousing claims and up to $3.9 million on account of import claims on an interim basis. On a final basis, the debtors seek $4.4 million in total payment for import claims.
- Motion to reject unexpired leases
- The debtors are parties to approximately 219 nonresidential real property leases in the U.S., the majority of which are retail store locations. As part of their ongoing restructuring efforts, the company and its advisors are conducting store-by-store performance analysis to evaluate, among other factors, historical and recent store profitability, historical and recent sales trends, occupancy costs, the geographic market in which each store is located, the mall in which each store is located, the potential to negotiate rent reductions with the applicable landlords and specific operational circumstances related to each store’s performance. The debtors have identified 12 retail stores as underperforming, all of which were closed prepetition and are currently vacant. The debtors seek authority to reject the leases of the vacant stores.
- Motion to pay employee wages and benefits
- The debtors seek to pay employee obligations as follows:
- Motion to use cash management system
- The company has bank accounts with Wells Fargo Bank, JPMorgan Chase Bank, Banco Popular de Puerto Rico and Bank of Hawaii.
- Motion to maintain customer programs
- The debtors estimate that, as of June 27, they have approximately $2.2 million of outstanding liability in the form of outstanding merchandise cards related to return and exchange policies. The company also has $56,900 of advertising program obligations and $176,279 in amounts owed under payment processing agreements. Lucky has approximately $2.3 million in outstanding gift card liability.
- Motion to maintain insurance programs
- Motion to pay taxes and fees
- The debtors seek to pay up to $904,990 on account of taxes and fees on an interim basis, with up to $1.3 million sought in total payment on a final basis.
- Motion to provide utilities with adequate assurance
- Application to appoint Epiq as claims agent
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