Fri 05/01/2020 15:40 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
Cash Collateral Motion
 
Summary
Rubie’s Costume Company designs, manufactures and distributes costumes and related accessories
Attributes filing to inability to obtain new financing, hindered by the Covid-19 pandemic and operational declines
Seeks to continue operating and solicit proposals to refinance its prepetition secured facility, “as well as consider options for a going concern sale if such efforts do not materialize”
 
Rubie's Costume Company, Inc., a Melville, N.Y.-based designer, manufacturer and distributor of costumes and related accessories, with a portfolio of non-exclusive licenses that include Marvel, Warner Brothers, Nickelodeon, Disney and Lucasfilm, filed for chapter 11 protection on Thursday night in the Bankruptcy Court for the Eastern District of New York. Despite stalled discussions with their existing secured bank group that precipitated the bankruptcy filing, the debtors are “optimistic” about obtaining a new asset-based lending facility to replace the prepetition facility. The debtors seek the use of cash collateral for operations, but say that “at some point” after the interim cash collateral period, they will need to obtain DIP financing.

Due to “operational declines,” the debtors started discussions with the prepetition bank group (including Bank of America, Wells Fargo Bank, JP Morgan Chase Bank, TD Bank, Citibank and HSBC Bank, USA, for which HSBC serves as agent) starting in early 2019, leading to various forbearance agreements beginning in June 2019 that were to run through May 4. However, the debtors recently received “sudden and unexpected news” on April 15 that one of the members of the group, Wells Fargo, would not fulfill its commitment to provide an asset based loan to replace the prepetition credit agreement, “based solely on its own internal Covid-19 related reasons, and not due to Rubie’s performance.” Ultimately, the parties were unable to reach agreement for further forbearance to facilitate refinancing efforts. The company’s bankruptcy is designed to afford it the chance to continue operating while soliciting proposals to refinance its prepetition secured facility, “as well as consider options for a going concern sale if such efforts do not materialize.” The debtors also say that they plan to cut costs and make other operational changes to address the impact of the Covid-19 pandemic.

The first day hearing has yet to be scheduled.

The company reports $100 million to $500 million in assets and $50 million to $100 million in liabilities. The company’s prepetition capital structure includes:
 
  • Secured debt: The debtors’ prepetition capital structure includes various secured lending facilities provided by a bank group consisting of Bank of America, Wells Fargo Bank, JP Morgan Chase Bank, TD Bank, Citibank and HSBC Bank, USA (HSBC serves as agent). The largest claims are listed by the debtors as follows:
 
  • Unsecured debt: $24.5 million (primarily owed to vendors), of which approximately $3 million is owed to entities owned or controlled by insiders who lease real property to the debtors.

“There is no reasonable dispute that the Bank Group is significantly over-secured,” a point acknowledged by the bank group and agent HSBC, according to the debtors, with a 20% equity cushion (emphasis added).

In addition to failure to obtain new financing, the filing was precipitated by various factors, including the Covid-19 pandemic, “certain operational declines” and a “downturn in sales due to a more general change in the business environment, insolvency of a number of the Debtors’ major trading partners, and the decision of many of Rubie’s licensors to grant non-exclusive licenses thereby allowing a multitude of other manufacturers/wholesalers to obtain licenses for certain popular designs and images,” the debtors say.

According to the first day declaration of Rubie’s President Marc Beige, “these chapter 11 filings give the Debtors the essential breathing space that they need to overcome this short term liquidity crisis caused by the COVID-19 crisis and the actions of the Bank Group.” Beige continues that the chapter 11 cases “allow for the Debtors to access the use of cash collateral to fund operations and payroll immediately and obtain a DIP financing facility, all pending the placement of an asset based lending facility as exit financing.”

The debtors add that they “anticipate that obtaining a replacement facility, while continuing to operate in the ordinary course, will take between 90 and 120 days and is likely to be achieved given the streamlining of the Debtors’ operations and cost structure that they have achieved in the last year, their very strong base of existing inventory and its continued receipt of significant Halloween season orders from its national client accounts.”

The debtors are represented by Meyer, Suozzi, English, & Klein and Togut, Segal & Segal as bankruptcy co-counsel, BDO USA as financial advisor and SSG Capital Advisors as investment banker. The case has been assigned to Judge Alan S. Trust (case number 20-71970).

Background

In business for “nearly 70 years,” Rubie’s is “one of the world’s largest” designers, manufacturers and distributors of costumes and related accessories and has license agreements with Marvel, Warner Brothers, Nickelodeon, Disney and Lucasfilm. The company says that, historically, its growth is driven by these third-party licensing agreements, as well as “rising interest among both adults and children in dressing up as authentic movie and television characters.” Rubie’s and its affiliates operate globally, with significant operations in 15 countries and distribution and sales operations in 52 countries spanning six continents.

For fiscal year 2020, the debtors forecast net sales and adjusted EBITDA of approximately $220 million to $230 million and $7 million to $8 million, respectively, representing an 18% decline in sales from fiscal year 2019 due to Covid-19. Notwithstanding a forecasted sales decline, the first quarter of fiscal 2020 yielded higher year-over-year purchase orders from “key” customers, which typically place the majority of their orders in the first quarter. The debtors say that cost-cutting initiatives “will help maintain profitability in fiscal year 2020 despite a projected decline in net sales.”

Rubie’s operates or contracts with manufacturing facilities globally and distributes its products wholesale worldwide. The debtors say that they often license “widely recognized designs from leading worldwide content providers” like Warner Brothers, Disney and Marvel and currently maintain approximately 75 licenses in the United States. The debtors have relationships with more than 2,000 retail accounts worldwide, both brick-and-mortar and e-commerce, including, but not limited to, Amazon, Target, Walmart and Party City, with more than 14,500 shipment destinations. On average, the debtors maintain relationships with retail accounts for more than 24 years, and approximately 99% of Rubie’s sales are to repeat customers. The debtors also maintain relationships with Asian contract manufacturers, which permit Rubie’s to streamline its sourcing operations and improve margins, the debtors say.

The debtors' largest unsecured creditors are listed below:
 
10 Largest Unsecured Creditors
Creditor Location Claim Type Claim Amount
Warner Bros. Burbank, Calif. Licensing
Fees
$    1,859,226
Wuyi Jingjie Clothing Co., Ltd. Zhejiang, China Vendor 1,114,568
Sun Wah Jian Xing Plastic Manufactory Shenzhen, China Vendor 1,083,563
Mars Hill International Limited Guangdong, China Vendor 1,073,248
FedEx Memphis, Tenn. Trade 1,031,939
Marvel Burbank Licensing
Fees
880,609
Amscan Elmsford, N.Y. Trade 574,324
Changzhou Sunwood International
Trading Co., Ltd.
Jiangsu, China Vendor 545,133
Jinhuazhihouo Garment Co., Ltd. Zhejiang, China Vendor 515,141
Adrenal LLC Seattle Sales
Commission
453,875

The case representatives are as follows:
 
Representatives
Role Name Firm Location
Debtors' Co-Counsel Edward J. LoBello Meyer, Suozzi,
English & Klein
Garden City, N.Y.
Howard B. Kleinberg
Jordan D. Weiss
Debtors' Co-Counsel Frank A. Oswald Togut, Segal
& Segal
New York
Brian F. Moore
Debtors' Financial
Advisor
Baker Smith BDO USA Atlanta
Debtors' Investment
Banker
N/A SSG Capital
Advisors
N/A
Debtors' Claims Agent Evan Gershbein KCC El Segundo, Calif.

Cash Collateral Motion

The debtors request the use of cash collateral of the prepetition secured bank group. The debtors assert the need for the use of approximately $17.14 million in pledged cash accounts ($7.7 million during the interim period). In addition to an estimated $10.14 million cash on hand at the end of the interim period, the debtors also have approximately $8.65 million in cash surrender value under Rubie’s life insurance policies pledged to the bank group and HSBC, inventory cost of $100.5 million (with an appraised value ranging from 35% to 45% of cost as of the petition date and continuing to increase to 55% of cost by June 2020, expected to continue increasing in cost value and appraised percentage of cost as Halloween approaches), $23 million in accounts receivable (projected at $13.3 million as of May, and to increase to $150 million “going forward” due to the seasonality of the business).

The company proposes the following adequate protection to the prepetition bank group and HSBC: replacement liens (excluding avoidance actions and their proceeds), superpriority administrative expense claims, monthly payment of current interest at the non-default rate and payment of professional fees.

The carveout for professional fees is $500,000.

The proposed budget is HERE, anticipating receipts of approximately $7.2 million during the interim period to be used as operating cash. The budget provides for the following disbursements:
 

The debtors also say that they will continue to fund intercompany advances to the “Rubie’s Group” of entities, of which many are subject to the same security interest of the bank group, and other affiliates in the amount of approximately $1.8 million.

The lien challenge deadline for the debtors is 60 days from entry of the interim order. For all other parties in interest, including an unsecured creditors’ committee, the deadline is 75 days after entry of the interim order.

The debtors submitted the declaration of Baker Smith of BDO, attached to the motion, in support of the cash collateral motion.

Other Motions

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