Fri 06/26/2020 17:38 PM
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In a bench ruling this afternoon in the Rubie’s Costume cases, Judge Alan Trust denied the debtors’ request for DIP financing that primes the prepetition lenders’ liens. Judge Trust found that the debtors failed to meet their burden of proof, including making a showing that there is in fact a 26% equity cushion, due in part to the debtors’ projections solely relying upon unsubstantiated expectations and assumptions that there would be a “mushrooming of its accounts receivable” when there is no evidence or testimony presented that would support this “blossom[ing]” of funds. Additionally, Judge Trust found that the debtors failed to provide evidence that would justify the priming of the prepetition lenders’ liens, which he noted should be done only in “extraordinary circumstances and only as a last resort.”

The DIP was challenged by the official committee of unsecured creditors and HSBC Bank, as administrative agent under the prepetition credit agreement. The trial on the matter lasted two days.

Judge Trust stated that while he appreciates the debtors’ hopeful belief that the company’s projections are “spot on,” the debtors have not shown on the record how, by the end of the proposed financing period’s 90 days, they can increase accounts receivable by or to $80 million. Further, Judge Trust found that the debtors had not provided sufficient evidence showing that the projected revenue accounts for not only the “substantial decline” in sales that the debtors have suffered the past several years but also the real effect of the Covid-19 pandemic on the debtors’ business and sales. Judge Trust did note, however, that neither party requested the court to take judicial notice of the effects of Covid-19 on the U.S. economy.

Further, Judge Trust found that the debtors failed to provide specific evidence to show that the debtors’ operations for 2020 will not show the same “substantial decline” in sales as seen in the fiscal years of 2018 and 2019. Judge Trust found that the debtors did not adequately show that the projected EBITDA will increase by the end of 2020 and continue to grow in 2021, when, according to his own calculations, there was negative EBITDA at the end of the 2019 fiscal year

Judge Trust also found that the $8.5 million cash value of life insurance policies that the debtors seek to prime are not assets of the estates and are not payable to the debtors and, therefore, cannot be used by the debtors for these purposes. Judge Trust found that there was no evidence presented nor legal authority to support the premise that the court could subordinate assets that are not property of the debtors’ estate.

In reviewing the testimony presented at trial, Judge Trust found that the record is mostly “generic and overall unpersuasive evidence” that does not establish that the debtors will see the expected increase in accounts receivable, which the debtors rely on for its DIP financing. With respect to the debtors’ witnesses, Judge Trust found that the testimony of Baker Smith, a managing director at the debtors’ financing advisor, BDO Consulting Group, and Marc Beige, the debtors’ president, did not provide necessary specifics about the projected sales and expenses, the appropriateness and accuracy of the projected 18% revenue decrease from end of fiscal year 2019 to 2020 due to Covid-19 pandemic and what funds would be necessary to satisfy the “committed orders.” With respect to those “committed orders,” Judge Trust stated that neither the debtors nor their witnesses provided specific breakdowns as to the amounts of “committed orders” received by customers such as Amazon, Costco, Target and Walmart, and whether those orders have been fulfilled or not, which Judge Trust indicated has an effect on the “reality” of the debtors’ current operations.

With respect to the Gordon Brothers’ inventory valuation, Judge Trust found that the liquidation analysis contains limitations that make clear that the values presented are only valid as to the effective date of Dec. 31, 2019, and does not account for the “global pandemic” or other “market conditions” after Dec. 31.

Judge Trust noted that the issue of cash collateral remains a “live request” and given that the debtors project having only a “razor thin” cash on hand available of $2 million as of this coming Monday, June 29, he expects that the debtors will submit a revised budget and request for another interim order to use cash collateral to cover the next two weeks of the debtors’ operations while they seek lending in the marketplace “that would be consistent with what the court would otherwise authorize.”

Prior to the hearing, as directed by the court, the UCC filed a status letter regarding the open issues that remained with respect to the DIP financing.
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