Relevant Documents:Voluntary PetitionFirst Day DeclarationRSA Term SheetPress ReleaseDIP Financing MotionFirst Day Hearing Agenda
|Party City commences “prenegotiated” chapter 11 cases under a restructuring support agreement with an ad hoc group of holders of more than 70% of approximately $912 million in first lien notes.
|The RSA contemplates a $150 million new-money DIP backstopped by the ad hoc group, as well as an equitization of first lien notes and an equity rights offering, with amount and pricing to be determined.
|RSA and DIP milestones require the debtors to file a plan by mid-March, but consenting noteholders have the option to force a sale process if the milestones are not met.
Party goods retailer Party City HoldCo Inc.
and 13 affiliates filed petitions on Tuesday evening, Jan. 17, in the U.S. Bankruptcy Court for the Southern District of Texas, reporting $2.87 billion in assets and $3.02 billion in liabilities. The debtors have total funded debt obligations of $1.45 billion. The debtors describe their chapter 11 case as “prenegotiated,” having entered bankruptcy under a restructuring support agreement with an ad hoc group of holders of more than 70% of the company's senior secured first lien notes. The debtors say they expect to complete the restructuring in the second quarter of 2023, with a May 17 outside date to go effective.
The first day hearing has been scheduled for today, Wednesday, Jan. 18, at 4 p.m. ET.
According to the debtors, the RSA
contemplates an “expedited restructuring” to substantially reduce the company’s debt and optimize its capital structure and liquidity. The RSA provides for a $150 million new-money DIP facility backstopped by the ad hoc group and equitization of approximately $912 million in first lien notes subject to dilution by an equity rights offering in an amount and discount to plan value to be determined. The new equity for noteholders would also be subject to dilution by a management incentive plan and any DIP equitization (discussed below). ABL facility claims would either be paid in full in cash through a refinancing or receive participation rights in a new ABL exit facility. Treatment of unsecured claims remains to be determined.
The RSA and DIP milestones require the filing of a plan and disclosure statement by March 18, confirmation by May 2 and emergence from chapter 11 by May 17. If the debtors fail to satisfy any of the milestones, the required consenting noteholders would have the option to force a sale process for substantially all assets, in which case the debtors would have 55 days from the noteholders’ exercise of such option to obtain sale approval.
According to the first day declaration of CRO and AlixPartners managing director David Orlofsky, the debtors intend to use chapter 11 to deleverage their balance sheet, gain access to new capital pursuant to the equity rights offering and right-size their lease portfolio. The debtors filed a motion
to reject 28 unexpired leases (listed HERE
), which represent roughly 4% of the company’s 764 corporate stores as of Nov. 30, 2022.
As described in the first day declaration, the $150 million DIP is open to all first lien noteholders - who must sign on to the RSA in order to participate in the DIP - and is backstopped by the first lien noteholder ad hoc group. Orlofsky says the debtors anticipate that additional first lien noteholders will sign on to the RSA, “adding to the already overwhelming support for the proposed restructuring and ensuring the success of these chapter 11 cases.” The debtors seek access to $75 million on an interim basis. The debtors have $23 million in cash on hand as of the petition date.
The RSA contemplates an 8% commitment premium for the DIP lenders. In exchange for their agreement to backstop the DIP, the ad hoc group members would receive either the option to equitize some or all of their DIP claims under a plan on the same pricing terms as the rights offering or, alternatively, a 10% cash premium.
The company’s non-U.S. subsidiaries, its Party City franchise stores and its Anagram business - “the global market leader in foil balloons,” according to the press release - are not part of the chapter 11 proceedings.
According to the first day declaration, a group of Anagram noteholders represented by Milbank is not a party to the RSA, but the group was “provided updates … regarding the restructuring leading up to the Petition Date.”
The RSA contemplates that the Anagram affiliates “shall be funded solely with their own sources of cash and proceeds of [the Anagram ABL]” and would not receive funding from the DIP, provided that “the Debtors shall not be prohibited from making any payments to the Anagram Wholly-Owned Subsidiaries provided under the Approved Budget in accordance with the DIP Orders.” In addition, the RSA requires that as a condition precedent to the effectiveness of any plan, the Anagram funded debt “shall have been refinanced, otherwise extended or received other treatment, in each case on terms acceptable to the Required Consenting Noteholders
” (emphasis added).
The case has been assigned to Judge David Jones (case No. 23-90005). The debtors are represented by Paul, Weiss, Rifkind, Wharton & Garrison as lead counsel, Porter Hedges as local counsel, AlixPartners as financial advisor, Moelis & Co. as investment banker and A&G Realty Partners as real estate advisor. The ad hoc group is represented by Davis Polk and Lazard Frères as investment banker.
The company’s prepetition capital structure is shown below:
The debtors provide the following organizational chart:
The debtors' largest unsecured creditors are listed below:
|10 Largest Unsecured Creditors
|Ankura Trust Company
Notes due 2026
Notes due 2023
|Dah Loong Development
|Trick or Treat Studios
The case representatives are as follows:
Background / Events Leading to Bankruptcy Filing
||Paul M. Basta
|Kenneth S. Ziman
|Michael M. Turkel
|Grace C. Hotz
|Evan Alexander Rocher
|Nicholas B. Strzeletz
||John F. Higgins
|M. Shane Johnson
|Adam B. Keil
||Moelis & Company
|Debtors' Real Estate
||A&G Realty Partners
|Counsel to JPMorgan
Chase Bank as Prepetition
|Financial Advisor to
JPMorgan Chase Bank as
Prepetition ABL Agent
|Counsel to the Ad Hoc
Group of Anagram
|Counsel to Ankura Trust
Company as DIP Agent
||Chapman and Cutler
|Co-Counsel to the Ad
Hoc Noteholder Group
|Damian S. Schaible
|Adam L. Shpeen
|Jonah A. Peppiatt
|Co-Counsel to the Ad
Hoc Noteholder Group
|Charles A. Beckham, Jr.
||Haynes & Boone
|Investment Banker to the
Ad Hoc Noteholder Group
|Counsel to the Agent for
PR North Dartmouth
||Kurtzman | Steady
|Debtors' Claims Agent
Party City is the largest vertically integrated designer, manufacturer, distributor and retailer of party goods in North America. Party City’s products are sold under the Amscan, Anagram and Brava brand names through Party City and Halloween City stores, as well as online. Party City operates approximately 823 retail stores, 770 of which are company-owned stores leased by Party City. The remaining 53 retail locations are franchised throughout the United States, Mexico and Puerto Rico.
In addition to Party City’s retail operations, the company generates revenue through the “design, manufacture and/or sourcing, and distribution and sale of decorative party goods for all occasions,” according to the declaration. Party City sells these party goods through its own retail locations, as well as other party superstores and “unaffiliated specialty retailers, mass merchants, e-commerce merchandisers, craft stores, grocery retailers, and dollar stores.”
The first day declaration touts the company’s 181 “next generation,” or NXTGEN, stores, designed to increase customer engagement. According to Orlofsky, the NXTGEN stores have experienced greater growth than the company’s other stores and the debtors remain committed to enhancing and refining the NXTGEN prototype based on customer feedback.
Party City generated approximately $2.35 billion of revenue in 2019, immediately prior to the onset of the Covid-19 pandemic in 2020. Even before the pandemic, Orlofsky says the company faced a challenging retail environment, including “declining consumer demand stemming from the general trend from brick-and-mortar to online retail channels.” Party City “nevertheless was well capitalized and positioned to respond to these cyclical trends” through certain targeted, strategic initiatives, says the declaration.
However, with the onset of the pandemic, Party City was forced to close all of its stores as “demand for gathering-oriented party products plummeted.” Though Party City “has experienced a rebound in sales and turnaround in demand since the height of the COVID-19 pandemic,” it continues to face challenging supply-chain disruptions, competition for available materials, and increased costs that have “significantly strained the Company’s ability to manufacture products and bring them to market.” The debtors say that they are one of the largest individual purchasers of helium in the United States, and point to a “global shortage” of helium gas because of decreased supply from “major producers,” including Russia. The company has also been impacted by labor shortages and rising labor costs.
In July 2020, to raise cash and address upcoming debt maturities, the company completed a private exchange offer for approximately $719.8 million (or 84.7%) of then-existing unsecured notes due 2023 and 2026. This exchange transaction allowed the company to raise approximately $90 million in new capital through an offering of new first lien notes issued by certain of the nondebtor Anagram entities to holders of existing unsecured notes. At the same time, participating unsecured noteholders exchanged $327 million of 2023 notes and $393 million of 2026 notes for a combination of $156.6 million in first lien floating-rate notes due 2025, $84.7 million of new second lien notes issued by certain of the Anagram entities, and 19.99% of PC Holdco’s common stock. As a result of this exchange transaction, Orlofsky says the company reduced its total debt at the time by $558 million and gained access to $90 million in new capital to support its operations and stay afloat during the pandemic.
Party City also engaged in several cost-cutting initiatives. In 2021, the company sold a substantial portion of its international operations, under the umbrella of Amscan International, to Endless LLP, a U.K.-based private equity investor, for $59 million. As part of the sale, debtor PC Holdco formed a joint venture with Amscan International to facilitate the costume sourcing and manufacturing business in Asia. Most recently, in November 2022, the company implemented a reduction in force that eliminated 75 (or 19%) of Party City’s existing and then-open corporate roles and has also initiated additional cost-saving measures related to contract negotiations, transportation optimization and requests for proposals.
In a further effort to shore up liquidity in July 2022, debtor PC Holdco amended the existing ABL facility to increase aggregate commitments to $562.1 million from $475 million, including the establishment of a new $17.1 million first-in, last-out facility, according to Orlofsky. In August 2022, nondebtors Anagram International and Anagram Holdings provided debtor PC Holdco with an unsecured intercompany loan of up to $22 million. Holders of 99.24% and 97.61% of the total outstanding principal amount of the Anagram entities’ first and second lien notes, respectively, consented to the issuance of the intercompany loan and, in exchange, received an aggregate fee of $1.5 million. The proceeds of this intercompany loan provided the debtors with additional runway leading up to the bankruptcy filing, according to the first day declaration.
After engaging restructuring advisors, the company began negotiations in November 2022 with the ad hoc group of first lien noteholders as well as the ad hoc group of Anagram noteholders represented by Milbank. Also in November 2022, the board of debtor PC Holdco established a restructuring committee, which was followed by the appointment of an independent director for the Anagram entities in December 2022.
After several months of “extensive” negotiations, Orlofsky says, the debtors’ negotiations with the ad hoc group of noteholders culminated in the Jan. 17 RSA.Restructuring Support Agreement
The RSA contemplates the following treatment of claims and interests under a plan:
- ABL claims: Holders would either (i) be paid in full in cash in the event the ABL facility is refinanced or (ii) “to the extent and on terms agreed to by the holders of ABL Claims,” receive loans and commitments under a new ABL exit facility acceptable to the debtors and required consenting noteholders, “including after accounting for any agreed repayment of ABL Claims to be made with excess cash and proceeds from the Rights Offering on the Plan Effective Date.”
- Secured notes claims: Holders would receive either (i) a pro rata share of equity in the reorganized company (with the issuer to be determined by the debtors with the consent of the required consenting noteholders), subject to dilution by the rights offering, the management incentive plan and, if applicable, the DIP equitization, or (ii) such other treatment as agreed between the debtors and required consenting noteholders.
- General unsecured claims: Treatment to be determined as acceptable to the debtors and required consenting noteholders.
- Existing company interests: Canceled without distribution.
Rights offering terms, including the amount and discount-to-plan equity value, are subject to ongoing negotiations with the consenting noteholders, with the “terms, structure, timing and solicitation process for the Rights Offering [to be] be set forth in the Plan.” The RSA contemplates a rights offering for capital stock or convertible debt securities “or other equity-linked securities” pursuant to a plan.
The RSA states that proceeds from the DIP facility and any other funding available to the debtors shall not be used to fund the Anagram wholly owned nondebtor subsidiaries, provided that the debtors shall not be prohibited from making any payments to these Anagram subsidiaries provided under the approved budget in accordance with the DIP orders.
The RSA gives required consenting noteholders various consent rights over lease modifications and any proposed rejection or assumption.
In addition, the RSA contemplates plan releases and exculpations in favor of certain delineated “company parties” and the consenting noteholders. The MIP would be adopted by the board of the reorganized debtors.
As mentioned above, the RSA requires that as a condition precedent to plan effectiveness, the Anagram funded debt “shall have been refinanced, otherwise extended or received other treatment, in each case on terms acceptable to the Required Consenting Noteholders.”
The RSA contemplates the following case milestones:
- Friday, Jan. 20 (3 days after petition date): Entry of interim DIP order;
- Feb. 7 (21 days after petition date): Deadline for debtors to deliver to the ad hoc group (i) an “acceptable” business plan and (ii) marketing materials for a sale of substantially all assets;
- Feb. 21 (35 days after petition date): Entry of final DIP order;
- March 18 (60 days after petition date): Deadline to file plan and DS;
- May 2 (105 days after petition date): Entry of confirmation order; and
- May 17 (120 days after petition date): Plan effective date.
If the debtors fail to satisfy any of the milestones, the required consenting noteholders would have the option to force the debtors to initiate a sale process for substantially all assets, in which case the RSA requires entry of a sale order by 55 days after the exercise of such option.DIP Financing Motion
The debtors have a commitment for a $150 million new-money senior secured superpriority and priming DIP term loan credit facility, with Ankura Trust Co. as DIP agent. The debtors are seeking authority to access $75 million on an interim basis. The DIP financing bears interest at ABR (with a 2% floor) plus 9% and SOFR (with a 1% floor and a credit-spread adjustment of 0.1%) plus 10%.
The DIP matures at the earliest of (a) June 19 (or in return for a PIK extension premium of 3% of principal amounts outstanding, a date that is no later than July 19); (b) the plan effective date; (c) the consummation of a sale or other disposition of substantially all assets; (d) the date of acceleration of the DIP facility and the termination of unused commitments upon and during the continuance of an event of default; or (e) 30 days from the petition date if no final order has been entered.
Participation in the DIP facility will be offered on a pro rata basis to each holder of Party City Holdings’ fixed-rate and floating-rate notes that executes the RSA by Jan. 27 at 5 p.m. ET
. Any unfunded amounts will be allocated to the DIP backstop parties on a pro rata basis.
The DIP facility includes various fees as summarized below:
- Commitment premium: 8% of the commitments in effect on the closing date, payable in cash or, if an acceptable plan is consummated, payable in either cash or in-kind as additional DIP loans at the option of the required lenders;
- Backstop commitment fee: The ad hoc noteholder group members would receive at their election, (a) in the event that a chapter 11 plan is consummated and includes a rights offering, the opportunity to convert their DIP loans into equity (or other equity-linked securities) in connection with any rights offering or (b) if such a chapter 11 plan is not consummated, payment of a cash fee equal to 10% of the outstanding loans under the DIP facility held by such ad hoc noteholder group member; and
- Delay draw unused line fee: 0.5% per annum of the average daily unused amount of each commitment of such lender.
DIP proceeds may be used to pay administrative costs of the cases and for general corporate purposes.
To secure the DIP financing, the debtors propose to grant liens on substantially all assets and property of the debtors, including avoidance action proceeds subject to a final order, and consistent with the prepetition ABL intercreditor agreement - meaning, “first liens on Prepetition 1L Notes Priority Collateral and unencumbered collateral and third liens on Prepetition ABL Priority Collateral, in all cases subject to the Prepetition Permitted Senior Liens.”
In support of the proposed DIP financing, the debtors filed the declaration
of Adam Keil, a managing director at Moelis, who states that in searching for financing, “it was highly likely that postpetition financing would have to be provided on a priming basis because, between the Prepetition 1L Notes Secured Parties and ABL Secured Parties, materially all of the Debtors’ assets are encumbered and there is not enough value in the Debtors’ assets that the Debtors could obtain a sufficiently large financing package to responsibly prosecute these chapter 11 cases on a junior secured or unsecured financing basis.”
As part of this process, the company engaged with the ABL agent, which provided terms for DIP financing and exit financing, but there was not positive investor feedback, and the ABL agent was not able to identify a lead investor. Discussions moved to focus on the ad hoc noteholder group, ultimately leading to agreement on DIP financing, which “underpins” the RSA. Keil says that through negotiations with the ad hoc group, the DIP lenders “agreed to eliminate a roll up feature that had been initially proposed and provided the opportunity for all similarly situated creditors to participate in the DIP financing opportunity”
(emphasis added). The declaration adds that the ad hoc noteholder group and other DIP lenders “have committed to provide substantial amount of capital to ensure execution of the chapter 11 plan.”
Outside of the ad hoc group’s DIP financing proposal, the debtors received two term sheets - one from the ABL agent and one from a third party - but the debtors say that neither was actionable, as the third party required funding by the ad hoc noteholder group (which “made clear” it was not interested) and the ABL proposal was uncommitted and required that unidentified third parties fund a substantial portion of the DIP financing on a junior secured basis.
The company proposes to provide the following adequate protection:
- To prepetition ABL lenders:
- An allowed superpriority administrative expense claim; replacement lien upon all of the DIP collateral, senior to all other liens but in the case of DIP first lien notes’ priority collateral subject and subordinate to: “(i) the Prepetition Permitted Senior Liens, (ii) the Carve-Out, (iii) the DIP Liens, (iv) the Prepetition 1L Notes Liens, and (v) the 1L Notes Adequate Protection Liens”; payment of prepetition and postpetition fees and expenses of prepetition ABL agent legal and financial professionals; information rights; an ABR rollover pursuant to which each term SOFR borrowing would automatically convert to an ABR borrowing upon termination of any applicable interest period; and an adequate protection account.
- To prepetition first lien notes secured parties:
- An allowed superpriority administrative expense claim, subject to the carve-out; replacement security interest in and lien upon all of the DIP collateral, subject and subordinate to prepetition permitted senior liens, the carve-out and the DIP liens; and payment of prepetition and postpetition fees and expenses of prepetition ABL agent legal and financial professionals.
In addition, the debtors propose a waiver of the estates’ right to seek to surcharge the prepetition lenders’ and DIP lenders’ collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b), subject to a final order.
The carve-out for professional fees is $4 million.
The proposed budget for the use of the DIP facility is HERE
The DIP financing is subject to the same milestones as the RSA milestones.
The lien challenge deadline is 60 days after appointment for an official committee of unsecured creditors and 75 days after entry of the interim DIP order for all other parties in interest. The UCC lien investigation budget is $100,000.Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for joint administration
- The cases will be jointly administered under case No. 23-90005.
- Designation as complex chapter 11 bankruptcy case
- Motion to establish trading procedures
- The debtors seek to establish trading procedures for its common stock, to be able to object to and prevent transfers if necessary to preserve net operating losses. The debtors have about $45 million in NOL carryovers at the end of 2022, as well as approximately $209 million of disallowed business interest expense carryforwards.
- Motion to pay employee wages and benefits
- The debtors seek authority, on a final basis, to pay approximately $41.6 million of unpaid prepetition amounts owed for wages, withholding, reimbursable employee expenses and employee benefits obligations, including certain cash-based awards under various incentive and retention programs that are owed to non-insider employees, according to the debtors.
- Motion to use cash management system
- The debtors’ cash management system consists of 69 bank accounts, 54 of which are maintained by the debtors, held at 20 different banks. As of the petition date, the debtors say that there is a total of $23.8 million in cash in all bank accounts together.
- Motion to pay critical vendors
- The debtors seek authority to pay their critical vendors up to $12.7 million on an interim basis for amounts that will become due within 21 days of the petition date, and up to $74 million on a final basis.
- The debtors summarize the proposed payments as follows:
- Motion to pay taxes and fees
- The debtors are seeking authority, on a final basis, to pay up to $26.1 million of accrued prepetition taxes and fees.
- Motion to reject executory contracts and abandon certain personal property
- Motion to provide utilities with adequate assurance
- Motion to maintain insurance programs
- Motion to continue customer programs
- The debtors seek authority on a final basis to continue their customer programs, including the payment in the ordinary course of approximately $14.5 million in outstanding prepetition obligations under their customer programs.
- Motion to extend time to file schedules to March 3
- Motion to restate and enforce worldwide automatic stay
- Because the debtors conduct business, including manufacturing and distribution, “worldwide,” and offer party goods “in more than 70 countries,” the debtors say that they “have many foreign creditors and counterparties to contracts in various jurisdictions that may not be familiar with” the U.S. bankruptcy system. As a result, the debtors say, they “need clear and compelling evidence of the protections offered by the Bankruptcy Code” so that all their suppliers, creditors and counterparties in foreign jurisdictions “understand that they must continue to perform their obligations under the Debtors’ contracts during the postpetition period.”
- Motion to file consolidated list of creditors and redact certain personal identification information
- Application to appoint Kroll as claims agent