Thu 07/29/2021 17:14 PM
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Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
Bid Procedures Motion
First Day Hearing Agenda





















Summary
GBG USA operates the North American business segment of Global Brands Group Holding Ltd., a branded apparel, footwear and brand management company
Entered into a stalking horse APA with WH AQ Holdings (as purchaser) and Hilco Trading (as guarantor) for the sale of their Aquatalia brand assets for a purchase price of $17.3 million
Seeks to continue marketing assets, including the Aquatalia assets and the assets related to other brands, for 50 days
Requests $16 million of new-money DIP financing ($12 million on an interim basis) from ReStore Capital

New York-based GBG USA Inc. - which, along with its debtor-affiliates, operates the North American business segment of Global Brands Group Holding Ltd., a branded apparel, footwear and brand management company - filed for chapter 11 protection today in the Bankruptcy Court for the Southern District of New York. Global Brands Group Holding Ltd. was incorporated in Bermuda and is publicly traded on the Hong Kong stock exchange.

The debtors say they enter chapter 11 “running on fumes” amid the “catastrophic effects of the global COVID-19 pandemic, industry-specific headwinds and other liquidity constraints.”

The debtors filed to implement a sale of their fashion brands and say that a “game plan has been developed with great care, thought and planning over the past several months.” The company and its advisors began marketing the debtors’ assets for sale in an organized prepetition bidding process in May, the results of which “have been fruitful,” with the debtors citing successfully negotiated asset sales related to two of the debtors’ brands, Spyder and Frye. These sales generated approximately $15 million and provided the debtors - “with the consent of their existing secured lenders” - with cash collateral to fund these chapter 11 cases and reduced the debtors’ need for supplemental DIP funding, the debtors say.

The debtors have also entered into a stalking horse purchase agreement with WH AQ Holdings (as purchaser) and Hilco Trading (as guarantor) for the debtors’ Aquatalia brand and business, which is “inspired by traditional Italian luxury shoemaking with innovative weatherproof and stain resistant technology.” The stalking horse bid provides for a purchase price of $17.3 million. The debtors say that they will continue to market their assets, including not only the Aquatalia assets subsumed by the stalking horse bid but also assets related to the debtors’ other fashion brands and certain other assets. Under the bid procedures motion, interested parties would have about 50 days - in addition to the three-month prepetition process - to submit bids.

The company has also secured a $16 million new-money DIP facility from ReStore Capital LLC to support the debtors’ liquidity needs during the chapter 11 cases. The debtors say that the DIP facility, coupled with the consensual use of cash collateral, “should provide the Debtors with sufficient funding to implement their sale strategy in an orderly and value maximizing manner.” Under the DIP, ReStore would be granted a priming lien solely on the debtors’ Aquatalia brand assets - the same assets subject to the stalking horse bid. “As reflected in the proposed Orders, the Prepetition Secured Parties that have liens that will be primed by liens granted on the Acquired Assets to secure the DIP Facility, have either explicitly consented, or are deemed to have consented, pursuant to the terms of an intercreditor agreement, to the priming of their liens and to the Debtors’ use of cash collateral,” the debtors say in the DIP financing motion.

According to a press release announcing the chapter 11 filing, the bankruptcy was filed to allow the debtors to conduct an in-court competitive marketing and auction process for a sale of substantially all of the assets of the “US Debtors” - consisting of GBG USA, its direct parent, GBG North America Holdings Co. Inc., and certain of their subsidiaries incorporated in North America - to third parties. “The sale(s) would support the Global Brands Group’s efforts to maximise the value of the US Debtors’ assets and conclude with the winding down of the remainder of the wholesale business in the United States,” the release adds.

The first day hearing has been scheduled for tomorrow, Friday, July 30, at 11 a.m. ET.

The debtors’ prepetition capital structure includes approximately $238.4 million in secured debt, as shown below:

The debtors are also party to a $22.8 million letter of credit facility provided by HK+Shanghai Banking Corp. Ltd. to backstop rent owed by debtor GBG USA for its leased premises at the Empire State Building, with the full amount outstanding as of the petition date. The debtors estimate $150 million in trade and other ordinary course obligations.

The company is represented by Willkie Farr & Gallagher as counsel, Ankura Consulting Group as restructuring advisor and Ducera Partners as financial advisor. Prime Clerk is the claims agent. The case has been assigned to Judge Michael E. Wiles (case No. 21-11369).

Events Leading to the Bankruptcy Filing

The debtors say that they “were not spared” from the “catastrophic effects” of the Covid-19 pandemic, noting that consumer demand has generally decreased across the fashion industry over the past 18 months. In fiscal 2020, the debtors’ gross sales dropped about 44%. In addition to forced closure of brick-and-mortar retail locations, the debtors’ wholesale business was similarly affected, with key customers experiencing their own store closures, resulting in a substantial loss of net sales from retail and wholesale angles. The debtors’ supply chain has also been disrupted, with certain of the debtors’ manufacturers lacking the materials or capacity to produce or distribute the debtors’ products. The company notes that its distribution networks have become increasingly backlogged.

Because of the ongoing liquidity constraints, several of the debtors’ vendors and suppliers recently ceased shipping the debtors’ products absent cash on delivery, cash in advance or, in some cases, payment of all outstanding invoices. Around the same time, certain of the debtors’ most crucial customers canceled their existing orders, which cut off other revenue streams.

In addition to pandemic-driven struggles, the debtors also blame their struggles on evolving retail trends, marked by increased spending online relative to brick-and-mortar channels.

The debtors also point to the June 2018 sale of a “significant portion” of their North American licensing business to Centric Brands Inc., fka Differential Brands Group Inc., which subsequently filed its own chapter 11 case in May 2020. After the Centric sale, the debtors and Centric were counterparties to and partners in a number of business arrangements, including (i) letters of credit provided by the debtors to vendors used by Centric, (ii) transition services agreements pursuant to which the debtors agreed to provide certain information technology and other functions for Centric, and (iii) the subleasing of certain office space from Centric. These obligations came into focus after Centric filed for bankruptcy relief in May 2020, the debtors say, citing as an example that they were forced to renegotiate their lease at the Empire State Building after Centric rejected their sublease.

And after Centric rejected its warehouse lease in West Hollywood, the landlord sued the debtors for joint and several liability. Similarly, the debtors were forced to assume costs associated with other executory contracts that were rejected by Centric pursuant to which the debtors were co-obligors. Further, during Centric’s bankruptcy case, an independent special committee of the board of Centric conducted an investigation into the existence of claims related to the Centric sale. As part of the investigation, the special committee identified certain claims and causes of action that Centric could assert against the debtors, but these claims were settled.

The debtors also highlight their significant royalty obligations from the debtors’ licensing of a number of brands from third parties. Historically, the majority of royalties paid by the debtors were the result of guaranteed minimum royalties required under that certain master license agreement with Authentic Brands Group LLC. Although this agreement was terminated prepetition in connection with the sale of assets related to the Spyder and Frye brands, and “despite the parties’ strong working relationship throughout the years, the guaranteed minimum royalties placed a significant strain on the Debtors’ balance sheet,” the debtors say.

The debtors entered into forbearance agreements with their first and second lien lenders, who agreed to waive and forbear from exercising remedies on account of the debtors’ failure to make certain amortization payments and satisfy certain financial covenants. In addition, the debtors agreed to, among other things, (i) pay lender advisor expenses and a forbearance fee in cash representing 0.25% of the outstanding first lien and second lien commitments; (ii) keep the lenders apprised of all developments with respect to Global Brands’ efforts to sell or finance certain business segments; and (iii) continue to retain its chief strategic officer on terms reasonably acceptable to the lenders.

As the debtors’ liquidity situation grew increasingly dire, restructuring discussions began to focus on the need to implement a potential sale of the debtors’ remaining assets through a chapter 11 bankruptcy. After an extensive, “months-long” multi-track negotiation process, the debtors’ efforts ultimately culminated in the execution of the stalking horse APA with WH AQ Holdings and Hilco.

Background

The debtors are a “market leading” wholesale and direct-to-consumer footwear and apparel business with a strong presence in the United States. The debtors maintain a diversified brand portfolio, including licensed brands owned by third parties and brands owned by the debtors. About 85% of the debtors’ revenue is derived from wholesale transactions whereby the debtors distribute their products to blue chip retail customers across multiple distribution channels, including Macy’s, Costco, TJ Maxx, Amazon.com, Nordstrom, Dillard’s, Burlington, Ross Stores, Bloomingdales, Haute Look, Neiman Marcus and Zappos. The debtors’ remaining revenue is generated by direct-to-consumer sales through their e-commerce platforms and physical retail locations in New York and San Francisco.

Global Brands Group Holding Ltd.’s three core business segments are North America, Europe and brand management. The debtors operate the North America business segment, which in fiscal 2020 represented about 59% of Global Brands’ total revenue. As disclosed in Global Brands’ press release, GBG USA accounted for 91.9% of the group’s operating loss of $222 million (unaudited) for the fiscal year ended March 31.

A number of leading U.S. brand owners contract with the debtors to handle the day-to-day operations of their brands, including, design, planning, sourcing and coordinating logistics, manufacturing, and retail presence. These brands include (i) All Saints, a London street scene-inspired footwear brand catering to an affordable fashion market; (ii) Le Tigre, an athletic-inspired, gender-neutral brand spanning men’s, women’s and collegiate product categories; (iii) Capezio, an athletic-inspired apparel brand for men, women and kids, offering “non-technical lifestyle sportswear categories”; and (iv) Saga, a youth-focused lifestyle and outerwear brand targeting sustainable and gender-neutral product offerings.

The debtors also sell merchandise for certain brands that they own outright (or through joint ventures), including (i) Aquatalia, a brand inspired by traditional Italian luxury shoemaking with weatherproof and stain-resistant technology; (ii) Ely & Walker, a Western shirt company catering to outdoors and work wear lifestyle customers; (iii) B New York, a minimalist brand catering to men’s, women’s and gifts categories; and (iv) MagnaReady, a magnetic apparel menswear brand catering to customers with limited mobility.

The debtors and their nondebtor affiliates do not manufacture their own merchandise but depend on their access to and relationships with a network of manufacturers, vendors, suppliers and third-party logistics providers, the majority of which are based in foreign countries. Most of these relationships are established through an arrangement with Millwork Pte. Ltd., a nondebtor affiliate based in Singapore, which sources the manufacturing and supply of the vast majority of the debtors’ products. The majority of the debtors’ products are shipped via ocean freighters, which deliver the products to ports in Long Beach, Calif., or Newark, N.J.

In addition to the debtors’ North American wholesale and direct-to-consumer business, Global Brands also operates a European wholesale business and a brand management business, which works with brand owners, retailers and manufacturing partners to engage new consumers by extending brands into new geographies and product categories. None of the European entities are debtors in these chapter 11 cases.

The corporate organizational structure is shown below:

 
The debtors' largest unsecured creditors are listed below:












































































10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
KR Hollywood LLC Los Angeles Rent $    Undetermined
Kenneth Cole Productions Inc. Secaucus, N.Y. Royalties 6,000,000
Authentic Brands Group LLC New York Royalties 3,561,713
ESRT 1333 Broadway LLC Brooklyn, N.Y. Rent 2,489,683
PPF RTL 113 Spring Street LLC New Orleans Rent 2,168,973
Brand Matter LLC  New York Royalties 1,997,412
144 5th Retail LLC New York Rent 1,511,067
Prisa LHC LLC Cranbury, N.J. Rent 1,437,953
Newglo Associates 284 LLC Boston Rent 1,405,979
Wisconsin Avenue Holdings Burlington, Mass. Rent 1,229,750

The case representatives are as follows:



 































































































Representatives
Role Name Firm Location
Debtors' Counsel Rachel C. Strickland Willkie Farr &
Gallagher
New York
Andrew S. Mordkoff
Ciara A. Copell
Debtors' Restructuring
Advisor
N/A Ankura
Consulting
 New York
Debtors' Financial
Advisor
David Skatoff Ducera
Partners
New York
Counsel to the First
Lien Lenders
Margot B. Schonholtz Linklaters New York
Penelope J. Jensen
Christopher J. Hunker
Counsel to the
Prepetition Agent
Alan Gamza Moses &
Singer
New York
Kent Kolbig
Counsel to Global
Brands Group
Holding Limited
Patrick Nash Kirkland
& Ellis
Chicago
Whitney Fogelberg
Counsel to the DIP
Agent, DIP Lenders
and Stalking Horse
Nazim Zilkha Dechert New York
Allan S. Brilliant
Stephen Wolpert
United States Trustee Richard C. Morrissey Office of the
U.S. Trustee
New York
Greg Zipes
Debtors' Claims
Agent
Benjamin J. Steele Prime Clerk New York



DIP Financing Motion

The debtors seek approval of $16 million in new-money term loan limited recourse DIP financing ($12 million on an interim basis) from ReStore Capital LLC as agent. GBG USA Inc. is the debtor, and Jimlar Corp., Krasnow Enterprises Ltd. and Krasnow Enterprises Inc. are guarantors.

The DIP financing would be secured by a priming first lien solely on the debtors’ Aquatalia brand assets, which are proposed to be acquired under the stalking horse APA. (Aquatalia is one of the brands in the debtors’ portfolio that they own outright). According to the motion, the DIP lenders required first liens on the Aquatalia assets, but the prepetition secured parties have consented to being primed solely to the extent of their liens on the DIP collateral. The DIP liens would not be payable from or include any avoidance actions.

The DIP financing bears interest at L+8%, with 2% added for the default rate, and matures on the earliest of six months after the petition date, consummation of a sale or 35 days after the petition date if the final order has yet to be entered.

The facility includes various fees, including a 4% closing fee and 4.5% exit fee.

In support of the proposed DIP financing, the debtors filed the declaration of David Skatoff, partner at Ducera Partners, who states that despite termination of the stalking horse APA being an event of default under the DIP facility, it is “not unreasonable for the DIP Lenders to be unwilling to agree in advance to fund a different transaction.”

The company proposes the following adequate protection to its prepetition first lenders: replacement liens (including proceeds of avoidance actions subject to the final order), allowed superpriority administrative expense claims (payable from proceeds of avoidance actions subject to the final order), “adequate protection payments in the amount of $1,000,000 payable under the Prepetition RCF (including, without limitation, the fees and expenses of counsel, breakage costs and accrued fees owing to the First Lien Agent and the other First Lien Secured Parties),” and payment of professional fees.

The second lien secured parties would be entitled to replacement liens (junior to the first lien adequate protection liens) and allowed superpriority administrative expense claims (payable from proceeds of avoidance actions subject to the final order, subject to the first lien adequate protection liens).

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 carve-out 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 60 days after entry of the final cash collateral for all parties in interest including an official committee of unsecured creditors, or if no committee is appointed, 75 days from entry of the final cash collateral order. The UCC lien investigation budget is $50,000.

Bid Procedures Motion

The debtors began a sale process in May, reaching out to more than 45 potential parties in interest, of which 30 signed confidentiality agreements. The debtors sold two of their licensed brands prepetition - Spyder and Frye - as well as their equity interests in Purrfect Ventures LLC, a nondebtor joint venture with Katy Perry. As the debtors’ “liquidity situation became more dire, discussions began to focus on the need to implement a potential sale of the Debtors’ remaining assets through a chapter 11 bankruptcy proceeding,” leading to a stalking horse APA with WH AQ Holdings LLC as purchaser and Hilco Trading LLC as guarantor. The stalking horse bid is $17.3 million for the debtors’ Aquatalia brand and related working capital assets. The debtors say that they also seek to market their other brands in their portfolio including Capezio, Ely & Walker and MagnaReady.

The debtors propose a 4% breakup fee ($700,000) and expense reimbursement up to $300,000. Initial overbids regarding the Aquatalia assets would be $100,000; subsequent overbids are $100,000.

In support of the proposed bid procedures, the debtors filed the declaration of David Skatoff, partner at Ducera Partners, who states that the proposed timeline was “explicitly required by the Stalking Horse Bidder and is generally supported by the Debtors’ major creditor constituencies, including the lenders under their DIP and prepetition secured credit facilities.”

The bid procedures includes the following proposed sale timeline:



Motion to Reject Executory Contracts and Unexpired Leases

The debtors seek to reject 19 leases, consisting primarily of leases related to debtor Fyre Retail LLC, and six executory contracts, consisting primarily of settlement agreements related to failure to meet rent payments under the Fyre lease agreements.

The debtors identified 19 leases that they say no longer occupy, do not provide any meaningful value to the estates and are burdensome to the debtors. By rejecting these leases, the debtors say that they anticipate they will save more than $1.65 million per month in anticipated rent and associated costs.

Prior to the petition date, debtors GBG USA Inc. and Frye were party to numerous leases in which Frye was the tenant and GBG USA Inc. was the guarantor. Due to the debtors’ liquidity constraints, they were unable to make rent payments for certain of their brick-and-mortar retail stores under the Frye leases, prompting certain landlords to commence litigation against the debtors for unpaid rent. As a result, prior to the petition date, debtors GBG USA Inc. and Frye entered into settlement agreements with certain of the landlords, pursuant to which the Frye leases were terminated and the debtors agreed to make monthly installment payments to the respective landlord. Under the agreements, once certain amounts are paid, the landlord would dismiss the underlying litigation. The total payments owed under the settlement agreements total approximately $1.8 million. The debtors have determined in their business judgment that such costs constitute a wasteful drain of estate assets, particularly since the Frye leases have terminated and the debtors have already vacated the premises.

The debtors filed the declaration of Mark Caldwell in support of the lease/contract rejection motion.

Other Motions

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


 



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