Financing Trends in Chapter 11 Retail Cases

Throughout 2019, the retail industry continued to struggle as numerous retailers — from a variety of product and apparel categories — sought bankruptcy relief. Further, many retailers entered chapter 11 with an intent to liquidate all, or substantially all, of their assets quickly and efficiently. In doing so, debtors and secured lenders utilized standard practices seen across all industries, such as sale-related milestones in DIP orders, but also sought relief unique to the retail industry. These practices underscored the importance of speed, which, in turn, preserved and protected the secured lenders’ position. This article examines and summarizes six retail chapter 11 filings from 2019: Shopko,[1] Gymboree,[2] Payless,[3] Charming Charlie,[4] Barneys[5] and Fred’s.[6] Each of those debtors, and their respective debtor-affiliates, pursued liquidation or going-out-of-business (GOB) sales either at the petition date or shortly thereafter. Of those cases, three debtors were “chapter 22” filings, having exited a prior chapter 11 case in recent years: Gymboree, Payless and Charming Charlie.

Pre-Petition Capital Structures

Pre-petition, all but one of those six debtors’ secured debt was comprised of both an asset-based loan (ABL) facility and a term loan agreement. Fred’s, a discount retailer and pharmacy chain, is the sole exception, as its secured debt included a revolving loan plus (1) a purchase and supply agreement with a pharmaceutical wholesaler, and (2) two commercial loans secured by real property.[7] Also, Charming Charlie had a vendor facility in addition to its ABL and term loan facilities.[8] The following chart details each’s debtors pre-petition debt structure and post-petition financing.

Post-Petition Financing

The primary, and typical, means by which these lenders sought to protect their recovery and collateral base was through defensive debtor-in-possession (DIP) loans from existing lenders, including “roll-ups” of pre-petition debt. Of these six debtors, five obtained post-petition DIP facilities from existing lenders. In Gymboree, for example, the debtors’ pre-petition term loan lender provided a DIP facility with $30 million of new money and a “roll-up” of $89 million in pre-petition secured debt.[9] Fred’s relied on a proposed DIP facility of $35 million that included a “roll-up” of $23.9 million in pre-petition debt under a revolving facility.[10]

Barneys, however, had some choice as to its financing. Barneys received a $75 million DIP loan proposal from a joint venture comprised of two liquidators and a $217 million DIP loan proposal from new lenders that would roll up and pay pre-petition secured debt of $192 million. Barneys ultimately pursued and obtained court approval for the $217 million DIP facility from new lenders.[11] In all instances, each DIP-financing or cash-collateral package included milestones for the timing of a § 363 sale or liquidation-related events — i.e., entry of a bid-procedures order, sale consummation and the commencement of GOB sales.[12]

Consulting Agreements

In all six cases, the debtors’ proposed package of first-day relief also included motions to assume an existing consulting or agency agreement between the debtors and a third-party liquidator or a joint venture of multiple liquidators, pursuant to § 365. This relief authorized consultants or agents to manage, conduct and continue GOB sales at a substantial portion of the debtors’ stores; this relief required the consent of secured lenders, as the inventory to be sold was generally the secured lenders’ collateral. Accordingly, a substantial portion of GOB sale proceeds are used to satisfy pre-petition secured debt.[13] The importance of speed in protecting secured lenders’ positions is also exemplified by the accelerated nature of the GOB sales; for example, in Charming Charlie, store-closing sales were expected to be completed within 51 days of the petition date.[14]

Speed Benefits All Stakeholders

In addition to secured lenders, retail cases also involve landlords, vendors and employees — all of which are potential administrative expense claimants. Thus, the importance of quick and orderly sales that maximize proceeds while limiting expenses and additional claims is critical. As seen in 2019, debtors and lenders have approached difficult retail cases with the simple notion that time diminishes recoveries for all parties.