Relevant Document:Agenda for First Day Hearing
At a fully consensual first day hearing today, Judge Laurie Selber Silverstein granted the David’s Bridal debtors their requested first day relief, including the debtors’ DIP financing motion, with certain modifications. The approval came after the court engaged in a lengthy back-and-forth with counsel to each of the debtors, the ABL lenders and the
ad hoc term loan group, questioning the parties on various aspects of their proposed relief despite no objections. Comments received from the U.S. Trustee were resolved ahead of the hearing, the debtors stated.
Although Judge Silverstein expressed trepidation about granting a full draw on the debtors’ $60 million DIP term loan facility within the first week of the cases, Judge Silverstein said that she is granting the requested relief based on the declaration of the debtor’s investment banker Stephen Goldstein, of Evercore, which explained the debtors’ need for the financing. The $60 million DIP is backed by the ad hoc lender group and Oaktree (collectively owning 85% of term loan claims.) In addition to the $60 million DIP term loan - which is open to all term lenders and will be replaced with a priority exit facility provided by term lenders at the end of the cases - the debtors’ DIP financing includes a rollup of the $125 million prepetition ABL facility. Judge Silverstein highlighted in her ruling the pre-existing liens and positions of the lender parties and that no better terms for the financing could be obtained. The judge said she understands that the debtors’ investment banker reached out to other funding sources as well and was unable to obtain commitments for junior DIP financing. The judge also noted during the hearing that there may not be an official committee of unsecured creditors appointed given support for the plan.
Regarding the rollup of the debtors’ $125 million prepetition ABL facility as well as the full draw on the $60 million DIP term loan during the first week of the cases, the court said she would grant each in this circumstance given the debtors’ inventory needs and the spending expected during this time of the year. She also noted that the rollup is subject to challenge and that the relief is requested in conjunction with a prepackaged bankruptcy plan “that pays 100 cents dollar.”
The debtors’ prepackaged plan - solicitation for which straddles the petition date - is backed by a restructuring support agreement executed on Nov. 18 by holders of 85% of term loan claims, holders of 97% of unsecured notes claims and the debtors’ principal equityholders. The debtors’ solicitation process straddles the petition date and remains open until Dec. 18. When asked by Judge Silverstein about the remaining 15% of term lenders and 3% of noteholders, Natasha Labovitz of Debevoise & Plimpton for David’s Bridal said that the debtors have not heard a dissent from either of those remaining parties and that the debtors do not know who the 3% of noteholders are. Similarly, the debtors have not heard from the “sliver” of nonsupporting equityholders. Scott Greenberg of Jones Day for the ad hoc group of term lenders elaborated on the remaining 15% of term lenders later in the hearing, as noted below.
Judge Silverstein approved substantially all the debtors’ requested first day relief including the debtor’s request for a combined DS and confirmation hearing, with the modification that
the confirmation hearing will be held on Jan. 4, 2019, instead of Dec. 28 as proposed in the DS approval motion.
Various parties spoke in court today, including Labovitz and Craig Bruens of Debevoise for the debtors; Scott Greenberg and Michael Cohen of Jones Day for the ad hoc group of term lenders; Glenn Siegel of Morgan Lewis for the ABL lenders; and Leslie Heilman of Ballard Spahr for a group of landlords.
Appearing on behalf of the debtors, Labovitz opened up the hearing by stressing the importance of moving through these cases quickly. In describing the debtors business, Labovitz said that David’s Bridal is the largest purveyor of wedding gowns in the United States and that approximately one-third of all U.S. brides wears a David’s Bridal gown. Counsel said that Bridal is “unique” among retailers in that it “is absolutely necessary” to have a brick-and-mortar presence throughout the process of brides ordering their gowns and attending fittings prior to receiving the actual gown. Labovitz said that the debtors’ “fully prepackaged plan of reorganization” contemplates no operational change. In the changing retail environment, David’s has been hampered by its debt structure and has been unable to fully invest in its business to respond, counsel said. Bridal plans to use the new money contemplated in the plan to continue its investment in online and marketing initiatives; Labovitz highlighted today the company’s
purchase of Blueprint, an online wedding registry, in August.
Labovitz explained that David’s Bridal’s selling season is later than other retailers and that peak buying is in the first calendar quarter. According to Labovitz, the company typically sees engagements happen over the holidays, with many weddings in the summer and dresses purchased in the first quarter. The debtors’ case timeline matches up with their efforts to launch a new 2019 line on Jan. 3, 2019, she said. Labovitz said that the parties knew that beginning the bankruptcy this week was the last possible chance to file for bankruptcy given the importance of being able to communicate to brides that their purchase is safe and that the company will not liquidate in January. She then referenced last year’s liquidation of Alfred Angelo, noting that the company “tumbled” into chapter 7 without the support of lenders. That event spooked potential customers, and the debtors and their press team have worked to ensure customers that their orders will not be disrupted and that dresses will be ready on time.
Leading up to the bankruptcy, the debtors engaged in “months of intense negotiations,” counsel reviewed. In April they hired Evercore and soon after entered into negotiations with RSA signatory Oaktree, a cross-holder owning approximately 50% of Bridal’s bonds and approximately 34% of its term loan debt. Counsel for Oaktree, Alan Kornberg of Paul Weiss, noted in court today that his clients fully support the proposed relief; the fund is also represented by Moelis & Co. as financial advisor. Labovitz stated that the company contemplated a debt-for-equity swap combined with a new-money infusion but ultimately did not receive the necessary financing. In mid-July, continued counsel, the debtors started discussions with the ad hoc group of term lenders working with Greenhill and Jones Day and also started informal negotiations with Solus, which is represented by Fried Frank and FTI Consulting and owns approximately one-third of Bridal’s bonds. On Oct. 15, she explained, the company made the “difficult decision” to defer bond interest and then the parties reached a deal on the restructuring support agreement on Nov. 14.
Greenberg of Jones Day presented the ad hoc group of term lenders’ initial statement in support of the debtors’ DIP financing, noting that the parties all “worked hard” to get to the prepackaged plan terms, despite it not always being clear that the parties would get there. The ad hoc term lender group filed its Rule 2019 motion ahead of the hearing, disclosing $248.8 million in aggregate term loan holdings as of today, Nov. 20. According to the first day declaration, there was $481.2 million outstanding under the term loan facility as of the Nov. 19 petition date. The lender group first organized proactively in the summer of 2017 when they “saw a problem coming” by looking at the capital structure, but Greenberg noted that it took “longer than [the group] hope[d]” to get an audience with the company. Various negotiations commenced between then and now, but the parties were “pushed [] to work around the clock” after the debtors decided to enter into a grace period after skipping the interest payment on their unsecured notes.
Greenberg noted that while the debtors have not completed solicitation on the prepack due to time constraints, “the numbers speak for themselves” with 85% of first lien lenders, 97% of unsecured noteholders and approximately 95% of equityholders supporting the plan. While the debtors have “cleared confirmation requirements,” the goal is to get to 100%, counsel explained. The ad hoc lender group will be the largest equityholders of the company on the back end, he said, adding that “to take that as currency for the term loan you need to believe in the underlying business and underlying business plan." The ad hoc group has shown its confidence through their commitment to the DIP financing and exit financing, he noted. The DIP financing will be replaced by a priority exit facility between $40 million and $60 million that will be open to all term lenders and tied to an additional 15% of equity ownership on top of the 76% of equity that is consideration to prepetition term lenders.
Greenberg also commented that from his clients’ standpoint, as supported by the debtors’ valuation, the term loan is “clearly” the fulcrum. Noting the 8.75% in reorganized equity and warrants contemplated as consideration to unsecured noteholders under the plan, Greenberg said it is “hard to find a ton of cases where, given the value and where it breaks, there would be such a large recovery to the unsecured notes.” That is the deal the lenders cut and they stand by it, he highlighted, but added that the agreement to that recovery to unsecured notes “speaks to the “fragility of business” and the fact that lenders realized they
could fight for every point of equity but also realized that could be a “mutual suicide pact” that could disintegrate under all the parties’ feet. Counsel added that when representing the fulcrum security in the future, the recoveries for unsecured noteholders in the case are “hopefully” not a precedent for retailers but added they make sense in this case because of the factors and tight timeline.
Speaking of the 15% of term loan lenders who have not signed up to the DIP financing, Greenberg said he believes that that is partially the function of certain lenders not being willing to get restricted ahead of the cases as part of negotiations. Although the DIP itself is backstopped, it is being offered to all lenders and the “goodies” tied to the commitment are for all participants.