Claire's Stores, Inc.
Claire’s Amended DS Estimates 72.4% Recovery on 1L Claims, $1.52B Midpoint Enterprise Value; Contemplates 2 Unsecured Claims Cash Recovery Pools Totaling $9.9M
Mon 07/09/2018 06:10 AM
Relevant Documents:
Amended RSA
Amended Plan
Disclosure Statement
Plan/DS Redlines
Amended Rights Offering Procedures
The Claire’s Stores debtors filed first amended versions of their plan and disclosure statement late Saturday night, July 7, including valuation and creditor recoveries and reflecting changes made to the underlying restructuring support agreement in place with the ad hoc group of first lien lenders. According to the filings, the debtors and the consenting creditors agreed on July 7 to amend the RSA to, among other things: (i) permit the debtors to “solicit, develop, and negotiate any and all plans of reorganization that contemplate a sale of some, all, or substantially all of the Debtors’ assets” and (ii) extend the milestone for the occurrence of the plan effective date to Sept. 30.
According to the valuation in the DS, Lazard, the debtors’ investment banker, estimates the reorganized debtors to have an enterprise value ranging from $1.355 billion to $1.68 billion, with a midpoint of $1.52 billion, and an estimated equity value range of between approximately $1.27 billion and $1.595 billion, with a midpoint of $1.435 billion. The first lien creditors, who are slated to receive 100% of the common equity, prior to dilution from the preferred equity and a potential management incentive plan, are estimated to recover 72.4% on their claims. Class 9 unsecured claims - which are allowed in the amount of $765.3 million - are estimated to receive between 0% and 0.53% recoveries; this estimate assumes $288.3 million of first lien deficiency claims and $232.4 million of second lien note claims are included in the class.
The amended RSA and revised marketing procedures come after the debtors went to court in June to defend their marketing process against Oaktree’s opposition; Judge Mary Walrath ruled that the debtors must consider other forms of bids besides the “payout event” construct contemplated in the debtors’ initial RSA that would pay the approximately $1.9 billion of first lien and structurally senior debt claims in full in cash. Pursuant to the marketing process order entered by Judge Walrath, the debtors served a marketing notice to initial participants and in, consultation with the unsecured creditors committee, served additional parties “that may be interested in submitting a Bid.” The debtors add that they subsequently delivered additional marketing materials in consultation with the UCC to such entities on June 29. Pursuant to the marketing procedures, the debtors say that they are “affirmatively soliciting bids for some, all, or substantially all the Debtors assets and/or the sponsorship of an alternative chapter 11 plan. Bids may provide for the payment of cash, the assumption of liabilities, and/or the issuance of ‘cramup’ debt securities pursuant to section 1129(b)(2)(A) of the Bankruptcy Code.”
The amended DS notes that the UCC - which, like Oaktree, had previously taken issue with the marketing construct - has asserted that entry into the RSA results from the sponsor’s control over the debtors “in violation of the absolute priority rule and the spirit of the Bankruptcy Code.” The debtors and the sponsor, the DS adds, disagree with the UCC’s assertions.
The amended plan contemplates two cash pools to be funded by the debtors on the effective date: a $3.9 million unsecured recovery cash pool and a $6 million general unsecured elective claim recovery cash pool, which we refer to as the GUC elective recovery cash pool. According to the plan, the unsecured claims that are first lien debt deficiency claims (allowed in the amount of $288.3 million), second lien notes claims ($232.4 million) and unsecured notes claims ($221.9 million) will share pro rata in the $3.9 million unsecured cash pool. The $6 million GUC elective cash pool will be available on a pro rata basis to holders of a general unsecured elective claim, which is defined as a general unsecured claim allowed in an amount of $450,000 or less, or reduced to $450,000, provided that holders “make an irrevocable written election to be treated as a General Unsecured Elective Claim.”
Exhibit A of the plan sets forth the amounts to be contributed by various debtor entities to the unsecured recovery cash pool. According to the exhibit, the amounts “may be reallocated among the Debtors, in their reasonable business judgment, to recalibrate for, among other things, the Claims asserted against the Debtors’ Estates after the occurrence of the Claims Bar Date.”
The debtors say that the new preferred equity interests shall initially be convertible into 26.3% of the reorganized Claire’s, assuming $200 million of preferred equity is raised, which implies an all-in initial liquidation preference of $346.3 million after incorporating the 37.5% discount and $26.3 million in fees payable in shares. The conversion percentage is based on the equity value implied by a $1.4 billion total enterprise value, according to a footnote in the RSA, assumes approximately $85 million of net debt ($250 million of funded debt and approximately $165 million of cash) and is prior to any dilution from a potential management incentive plan. According to the debtors, the terms and conditions of a management equity incentive plan “shall be filed with the Plan Supplement and be reasonably acceptable to the Requisite Consenting Creditors and the Debtors” and the DS notes that the MIP remains subject to ongoing negotiations between the debtors and consenting creditors.
Regarding the make whole premiums associated with the new money term loan and preferred equity, the debtors added a paragraph that says: “The Creditors’ Committee asserts that the Make-Whole Premiums, as well as the Preferred Redemption Premiums, position the Backstop Parties to recover nearly $1.5 billion immediately following the Effective Date and that such a recovery would negatively impact the Reorganized Debtors’ ability to address future working capital needs. The Debtors dispute the Creditors’ Committee’s assertions.”
In the plan redline, the debtors disclose entry into a forbearance agreement on April 19 with the CLSIP term loan lenders, pursuant to which the CLSIP term loan lenders agreed to forbear from exercising remedies under the CLSIP term loan agreement with respect to events of default.
The hearing for approval of the disclosure statement is scheduled for July 17 at 2 p.m. ET, with objections due July 10 at 4 p.m. ET.
Plan Classes
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 (with revisions shown in bold):
The debtors’ investment banker Lazard prepared a valuation analysis for the reorganized debtors, presented in Exhibit I of the disclosure statement, assuming an effective date of Sept. 30 and utilizing market data as of June 29. According to Lazard, the estimated range of enterprise value of the reorganized debtors, collectively, is approximately $1.355 billion to $1.68 billion, with a midpoint of $1.52 billion. Assuming $85 million of net debt ($250 million of debt and approximately $165 million of cash), this implies an estimated equity value range of between approximately $1.27 billion and $1.595 billion, with a midpoint of $1.435 billion.
According to the exhibit, In performing the valuation analysis, Lazard relied on the comparable companies analysis and while “Lazard also considered the discounted cash flow analysis, Lazard is of the view that it is of limited relevance for estimating the Enterprise Value of the Debtors given the facts and circumstances particular to the Debtors and market feedback received to-date. Similarly, Lazard deemed the precedent transactions analysis to be of limited relevance because of the limited number of recent public transactions for companies that are comparable in certain respects to the Reorganized Debtors.” According to Lazard, it employed a sum-of-the-parts approach that separately valued the debtors’ North American and European operations on a standalone basis, specifying that the estimated enterprise value range of the reorganized debtors includes both the North American and European operations together. However, the analysis does not provide the estimated enterprise values for the standalone operations.
According to the valuation analysis, the estimate of the reorganized debtors’ value is based on information provided by management, including the financial projections and information provided by other sources, including the results of the marketing process conducted by the debtors. With respect to financial projections, the debtors’ management, in conjunction with advisors, “developed and refined the business plan” and prepared financial projections from fiscal year 2018 (ending Feb. 2, 2019) through fiscal year 2022 (ending Jan. 28, 2023). The projections, attached as Exhibit G and provided below, assume an effective date of Sept. 28.
According to the projections, the debtors expect to generate $1.318 billion of net sales in fiscal 2018, representing a negative 0.2% growth rate. The debtors are projecting to grow net sales at a 4.2% compounded annual growth rate over the period, expecting to end fiscal 2022 with $1.613 billion in net sales. The projections indicate that gross margin is expected to expand every year, starting at 52% in fiscal 2018 and ending at 56.8% in fiscal 2022. Adjusted EBITDA margin is also projected to expand every year, starting at 17.6% in fiscal 2018 and ending at 21.5% in fiscal 2022. Adjusted EBITDA is projected to grow at a CAGR of 6.2% for the five-year period, ending at $351.2 million in fiscal 2022. Despite the slight year-over-year decline in net sales, adjusted EBITDA is projected to grow 9.8% to $233.1 million in fiscal 2018.
The debtors project $33 million of average annual capital expenditures, $43 million of average annual cash taxes and minimal changes in net working capital for the next five years. According to the projections, the debtors anticipate $61.4 million in unlevered free cash flow for fiscal 2018, after $120.5 million of restructuring charges and exit costs. After the $450 million of new money exit financing proceeds, approximately $242.5 million used to repay the Gibraltar and CLSIP loans, $31 million used to repay ABL facilities and $67.7 million of cash for debt service, the debtors are projecting net cash flow of $170.2 million in fiscal 2018. For fiscal 2019 through fiscal 2022, the debtors expect unlevered free cash flow to grow at a CAGR of 5% from $206.1 million to $250.3 million. After roughly $75 million of cash interest, the debtors anticipate levered free cash flow of $130 million in fiscal 2019, which grows to $174 million in fiscal 2022. The debtors project to end fiscal 2018 with $212.6 million of cash, which is projected to increase consistently every year until it reaches $837.3 million at the end of fiscal 2022.
Liquidation Analysis
The debtors have included a hypothetical chapter 7 liquidation analysis, attached as Exhibit H, “to demonstrate that the Plan satisfies the ‘best interests of creditors’ test.” According to the debtors, the liquidation analysis reflects estimated asset and liability values as of Sept. 30, primarily based on information as of June 2, and assumes a 12-month liquidation process. The debtors provide low and high cases for Claire’s Stores Inc. on a consolidated basis and for individual debtor entities as well. In the low case the debtors on a consolidated basis have $186.5 million of net distributable proceeds, which would result in a 6% recovery to the first lien debt claims after wind-down costs, prepetition LC facility claims and DIP claims. In the high case, the debtors have estimated $303.5 million of net distributable proceeds, which would result in a 16% recovery to first lien claims.
Amended RSA
Amended Plan
Disclosure Statement
Plan/DS Redlines
Amended Rights Offering Procedures
The Claire’s Stores debtors filed first amended versions of their plan and disclosure statement late Saturday night, July 7, including valuation and creditor recoveries and reflecting changes made to the underlying restructuring support agreement in place with the ad hoc group of first lien lenders. According to the filings, the debtors and the consenting creditors agreed on July 7 to amend the RSA to, among other things: (i) permit the debtors to “solicit, develop, and negotiate any and all plans of reorganization that contemplate a sale of some, all, or substantially all of the Debtors’ assets” and (ii) extend the milestone for the occurrence of the plan effective date to Sept. 30.
According to the valuation in the DS, Lazard, the debtors’ investment banker, estimates the reorganized debtors to have an enterprise value ranging from $1.355 billion to $1.68 billion, with a midpoint of $1.52 billion, and an estimated equity value range of between approximately $1.27 billion and $1.595 billion, with a midpoint of $1.435 billion. The first lien creditors, who are slated to receive 100% of the common equity, prior to dilution from the preferred equity and a potential management incentive plan, are estimated to recover 72.4% on their claims. Class 9 unsecured claims - which are allowed in the amount of $765.3 million - are estimated to receive between 0% and 0.53% recoveries; this estimate assumes $288.3 million of first lien deficiency claims and $232.4 million of second lien note claims are included in the class.
The amended RSA and revised marketing procedures come after the debtors went to court in June to defend their marketing process against Oaktree’s opposition; Judge Mary Walrath ruled that the debtors must consider other forms of bids besides the “payout event” construct contemplated in the debtors’ initial RSA that would pay the approximately $1.9 billion of first lien and structurally senior debt claims in full in cash. Pursuant to the marketing process order entered by Judge Walrath, the debtors served a marketing notice to initial participants and in, consultation with the unsecured creditors committee, served additional parties “that may be interested in submitting a Bid.” The debtors add that they subsequently delivered additional marketing materials in consultation with the UCC to such entities on June 29. Pursuant to the marketing procedures, the debtors say that they are “affirmatively soliciting bids for some, all, or substantially all the Debtors assets and/or the sponsorship of an alternative chapter 11 plan. Bids may provide for the payment of cash, the assumption of liabilities, and/or the issuance of ‘cramup’ debt securities pursuant to section 1129(b)(2)(A) of the Bankruptcy Code.”
The amended DS notes that the UCC - which, like Oaktree, had previously taken issue with the marketing construct - has asserted that entry into the RSA results from the sponsor’s control over the debtors “in violation of the absolute priority rule and the spirit of the Bankruptcy Code.” The debtors and the sponsor, the DS adds, disagree with the UCC’s assertions.
The amended plan contemplates two cash pools to be funded by the debtors on the effective date: a $3.9 million unsecured recovery cash pool and a $6 million general unsecured elective claim recovery cash pool, which we refer to as the GUC elective recovery cash pool. According to the plan, the unsecured claims that are first lien debt deficiency claims (allowed in the amount of $288.3 million), second lien notes claims ($232.4 million) and unsecured notes claims ($221.9 million) will share pro rata in the $3.9 million unsecured cash pool. The $6 million GUC elective cash pool will be available on a pro rata basis to holders of a general unsecured elective claim, which is defined as a general unsecured claim allowed in an amount of $450,000 or less, or reduced to $450,000, provided that holders “make an irrevocable written election to be treated as a General Unsecured Elective Claim.”
Exhibit A of the plan sets forth the amounts to be contributed by various debtor entities to the unsecured recovery cash pool. According to the exhibit, the amounts “may be reallocated among the Debtors, in their reasonable business judgment, to recalibrate for, among other things, the Claims asserted against the Debtors’ Estates after the occurrence of the Claims Bar Date.”
The debtors say that the new preferred equity interests shall initially be convertible into 26.3% of the reorganized Claire’s, assuming $200 million of preferred equity is raised, which implies an all-in initial liquidation preference of $346.3 million after incorporating the 37.5% discount and $26.3 million in fees payable in shares. The conversion percentage is based on the equity value implied by a $1.4 billion total enterprise value, according to a footnote in the RSA, assumes approximately $85 million of net debt ($250 million of funded debt and approximately $165 million of cash) and is prior to any dilution from a potential management incentive plan. According to the debtors, the terms and conditions of a management equity incentive plan “shall be filed with the Plan Supplement and be reasonably acceptable to the Requisite Consenting Creditors and the Debtors” and the DS notes that the MIP remains subject to ongoing negotiations between the debtors and consenting creditors.
Regarding the make whole premiums associated with the new money term loan and preferred equity, the debtors added a paragraph that says: “The Creditors’ Committee asserts that the Make-Whole Premiums, as well as the Preferred Redemption Premiums, position the Backstop Parties to recover nearly $1.5 billion immediately following the Effective Date and that such a recovery would negatively impact the Reorganized Debtors’ ability to address future working capital needs. The Debtors dispute the Creditors’ Committee’s assertions.”
In the plan redline, the debtors disclose entry into a forbearance agreement on April 19 with the CLSIP term loan lenders, pursuant to which the CLSIP term loan lenders agreed to forbear from exercising remedies under the CLSIP term loan agreement with respect to events of default.
The hearing for approval of the disclosure statement is scheduled for July 17 at 2 p.m. ET, with objections due July 10 at 4 p.m. ET.
Plan Classes
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 (with revisions shown in bold):
- Class 1 - Other Priority Claims: Receive payment in full in cash on effective date.
- Class 2 - Other Secured Claims: Receive payment in full in cash, reinstatement of holders’ allowed other secured claim on effective date.
- Class 3 - Prepetition ABL Claims (all debtors other than Claire’s parent): Receive payment in full in cash on effective date.
- Class 4 - Prepetition LC Facility Claims: Receive, subject to the reasonable consent of the requisite consenting creditors, at the debtors’ discretion, treatment rendering holders’ claims unimpaired or reinstatement.
- Class 5 - Prepetition ABL Claims:Allowed in the amount of $0. Receive cash recovery in an amount equal to holders’ claims.
- Class 6 - Prepetition RCF Claims (split from Class 5): Allowed in the amount of $0. Receive cash recovery in an amount equal to holders’ claims.
- Class 7 - First Lien Debt Secured Claims (all debtors other than Claire’s parent): Allowed in the amount of $1,137,612,367.85. Receive pro rata share of: (i) 100% of reorganized Claire’s Inc. equity, subject to dilution from the new preferred interests and the MIP; (ii) with respect to eligible first lien holders, first lien subscription rights and; (iii) with respect to ineligible first lien holders, cash in the amount equal to the value of the first lien subscription rights that would have been received if such holder was an eligible first lien holder.
- Class 8 - Unsecured Claims (Claire’s parent): Unsecured claims against Claire’s Inc. that are first lien deficiency claims are allowed in the amount of $0. Receive a cash distribution on a pro rata basis from Claire’s Inc. assets.
- Class 9 - Unsecured Claims (all debtors other than Claire’s parent): Unsecured claims that are first lien debt deficiency claims would be allowed in the aggregate amount of $288,287,776.49. Unsecured claims that are second lien notes claims would be allowed in the aggregate amount of $232,383,775. Unsecured claims that are unsecured notes claims would be allowed in the aggregate amount of $221,781,251.50. Commencing on the initial unsecured claims distribution date, holders of Class 8 claims against any debtor other than Claire’s Inc. would receive a pro rata share of the $3.9 million unsecured recovery cash pool.
- Class 10 - General Unsecured Elective Claims (all debtors other than Claire’s parent): Receive a pro rata share of the general unsecured elective claim recovery cash pool of $6 million.
- Class 11 - Prepetition Intercompany Claims: Receive such treatment as to render such Class 11 holder unimpaired.
- Class 12 - Section 501(b) Claims: Canceled, discharged and extinguished as of the effective date, and holders of section 510(b) claims will not receive any distribution on account of such claims.
- Class 13 - Intercompany Interests: Reinstated so as to maintain the debtors’ organizational structure on the effective date unless implementation of the restructuring requires otherwise.
- Class 14 - Existing Claire’s Parent Equity Interests: Receive a pro rata share of:
- With respect to eligible shareholders, the shareholder subscription rights;
- With respect to ineligible shareholders, cash in the amount equal to the value of the shareholder subscription rights that would have been distributable to such shareholder if such shareholder was an eligible shareholder; and
- The cash proceeds or other consideration, if any, available from the “Claire’s Parent Assets” after all allowed claims against Claire’s Inc. are satisfied in full with the proceeds from Claire’s Inc. assets. Claire’s Parent Assets refer to all assets belonging to Claire’s Inc. and/or its estate, including (i) prepetition first lien term loan claims, (ii) CLSIP term loan obligations, (iii) Gibraltar 2021 unsecured term loan obligations and (iv) the cash proceeds from any of the foregoing; provided that they shall not include any intercompany interest held by Claire’s Inc.
The debtors’ investment banker Lazard prepared a valuation analysis for the reorganized debtors, presented in Exhibit I of the disclosure statement, assuming an effective date of Sept. 30 and utilizing market data as of June 29. According to Lazard, the estimated range of enterprise value of the reorganized debtors, collectively, is approximately $1.355 billion to $1.68 billion, with a midpoint of $1.52 billion. Assuming $85 million of net debt ($250 million of debt and approximately $165 million of cash), this implies an estimated equity value range of between approximately $1.27 billion and $1.595 billion, with a midpoint of $1.435 billion.
According to the exhibit, In performing the valuation analysis, Lazard relied on the comparable companies analysis and while “Lazard also considered the discounted cash flow analysis, Lazard is of the view that it is of limited relevance for estimating the Enterprise Value of the Debtors given the facts and circumstances particular to the Debtors and market feedback received to-date. Similarly, Lazard deemed the precedent transactions analysis to be of limited relevance because of the limited number of recent public transactions for companies that are comparable in certain respects to the Reorganized Debtors.” According to Lazard, it employed a sum-of-the-parts approach that separately valued the debtors’ North American and European operations on a standalone basis, specifying that the estimated enterprise value range of the reorganized debtors includes both the North American and European operations together. However, the analysis does not provide the estimated enterprise values for the standalone operations.
According to the valuation analysis, the estimate of the reorganized debtors’ value is based on information provided by management, including the financial projections and information provided by other sources, including the results of the marketing process conducted by the debtors. With respect to financial projections, the debtors’ management, in conjunction with advisors, “developed and refined the business plan” and prepared financial projections from fiscal year 2018 (ending Feb. 2, 2019) through fiscal year 2022 (ending Jan. 28, 2023). The projections, attached as Exhibit G and provided below, assume an effective date of Sept. 28.
According to the projections, the debtors expect to generate $1.318 billion of net sales in fiscal 2018, representing a negative 0.2% growth rate. The debtors are projecting to grow net sales at a 4.2% compounded annual growth rate over the period, expecting to end fiscal 2022 with $1.613 billion in net sales. The projections indicate that gross margin is expected to expand every year, starting at 52% in fiscal 2018 and ending at 56.8% in fiscal 2022. Adjusted EBITDA margin is also projected to expand every year, starting at 17.6% in fiscal 2018 and ending at 21.5% in fiscal 2022. Adjusted EBITDA is projected to grow at a CAGR of 6.2% for the five-year period, ending at $351.2 million in fiscal 2022. Despite the slight year-over-year decline in net sales, adjusted EBITDA is projected to grow 9.8% to $233.1 million in fiscal 2018.
The debtors project $33 million of average annual capital expenditures, $43 million of average annual cash taxes and minimal changes in net working capital for the next five years. According to the projections, the debtors anticipate $61.4 million in unlevered free cash flow for fiscal 2018, after $120.5 million of restructuring charges and exit costs. After the $450 million of new money exit financing proceeds, approximately $242.5 million used to repay the Gibraltar and CLSIP loans, $31 million used to repay ABL facilities and $67.7 million of cash for debt service, the debtors are projecting net cash flow of $170.2 million in fiscal 2018. For fiscal 2019 through fiscal 2022, the debtors expect unlevered free cash flow to grow at a CAGR of 5% from $206.1 million to $250.3 million. After roughly $75 million of cash interest, the debtors anticipate levered free cash flow of $130 million in fiscal 2019, which grows to $174 million in fiscal 2022. The debtors project to end fiscal 2018 with $212.6 million of cash, which is projected to increase consistently every year until it reaches $837.3 million at the end of fiscal 2022.
Liquidation Analysis
The debtors have included a hypothetical chapter 7 liquidation analysis, attached as Exhibit H, “to demonstrate that the Plan satisfies the ‘best interests of creditors’ test.” According to the debtors, the liquidation analysis reflects estimated asset and liability values as of Sept. 30, primarily based on information as of June 2, and assumes a 12-month liquidation process. The debtors provide low and high cases for Claire’s Stores Inc. on a consolidated basis and for individual debtor entities as well. In the low case the debtors on a consolidated basis have $186.5 million of net distributable proceeds, which would result in a 6% recovery to the first lien debt claims after wind-down costs, prepetition LC facility claims and DIP claims. In the high case, the debtors have estimated $303.5 million of net distributable proceeds, which would result in a 16% recovery to first lien claims.
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.