Register, or Login to view the article
August 30, 2019 – The Debtors' Official Committee of Unsecured Creditors (the “Committee” which is comprised of the Debtors’ major trade vendors, landlords and a union) objected to the Debtors’ proposed “smoke and mirrors" debtor-in-possession (“DIP”) financing (i) fails to provide the cash necessary “to conduct a fulsome sale process or even to replenish inventory in the ordinary course” and is (ii) burdened with “excessive fees that will quickly swallow any benefit of such financing to these estates.” As to the under-funding of the Debtors' Chapter 11 cases, the Committee calculates that after taking into account the roll-up of pre-petition debt, the proposed DIP financing leaves only $14.9mn (net of fees) of "fresh capital," not enough "to conduct a fulsome sale process or even to replenish inventory in the ordinary course."
The second, even more emotive, issue is the question of fees. Even back when the DIP financing was to come from a contractual joint venture comprised of Gordon Brothers and Hilco Global, the fees were eye-popping (as we reported then). Almost undoubtedly, it was the irresistible level of fees that cost the Gordon Brothers/Hilco Global team their role as DIP lender (there is some sort of morality story here about greed, or at least a reminder to fly below the fee radar). Literally within hours of the fee numbers becoming public, a much larger financing package had been offered to the Debtors by the current DIP lenders ($218.0mn vs $75.0mn), an offer even more attractive to the Debtors' pre-petition lenders, who get paid out in full now as opposed to after an asset sale, than to the Debtors.
As we wrote then, the current DIP lenders kept the "frothy interest rate of LIBOR+12% and large 'First Facility Fee' and 'Exit Fee' at 5%. Little wonder that the Debtors were able to attract further (and considerably larger) interest from DIP financing providers."
The Committee's number crunching on the fees supports just how special these numbers were: a 32.8% annualized rate of return over a projected 3-month bankruptcy. That, however, is before calculating an "Enhancement Fee" which will generate a further 37.5% payment (fee) based on the remaining value of the Debtors' estates after DIP borrowings have been repaid. The Committee's objection stating: "The Enhancement Fee is an outrageous and offensive ‘profit’ or ‘participation’ interest that is designed to take unfair and undue advantage of the Debtors at the expense of general unsecured creditors."
The objection continues: “The Committee appreciates that the Debtors desperately need rescue financing given the liquidity crises that the Debtors have endured over this past year. Unfortunately, the rescue financing that the Debtors have proposed mostly consists of ‘smoke and mirrors’ with insufficient fresh capital to conduct a fulsome sale process or even to replenish inventory in the ordinary course, and excessive fees that will quickly swallow any benefit of such financing to these estates. The Debtors need a true lifeline and not a lead balloon that will only serve to weigh down the possibility of a going concern sale. In the end, the most likely outcome here under the proposed rescue financing is a forced liquidation of the Debtors and their valuable intellectual property –something that the Committee (and hopefully the Debtors) want to avoid. The Committee believes that a financing package with appropriate market terms will increase the chances of a successful going concern sale to preserve this iconic company.
As currently proposed, the Debtors seek approval of up to $217 million in debtor in possession financing (the ‘DIP Facility’) (all of which is now available on an interim basis) from Brigade Capital Management, LP, B. Riley Financial, Inc., and GACP Finance Co., LLC, directly or through their affiliates (together, the ‘DIP Lenders’), with GACP Finance as administrative agent.
The DIP Facility is primarily a refinancing or roll-up of the Debtors’ prepetition secured debt owed to the Prepetition Lenders…in the aggregate principal amount of approximately $192 million (without any evidence that such prepetition debt is oversecured), plus payment of various fees and interest. The Committee estimates that only $14.9 million of actual new money advances (net of fees) will be available to the Debtors under the DIP Facility, which is not enough liquidity for the Debtors to even replenish inventory in the ordinary course and could lead to administrative insolvency.
In consideration of this modest amount of fresh capital, the DIP Facility requires the Debtors to incur an astounding amount of fees, including perhaps the most egregious and value-depleting ‘Enhancement Fee’ that the Committee’s professionals, who collectively have more than a century of experience, have ever seen. In addition to a commitment fee of 5%, a monthly fee of $100,000, an exit fee of 5%, and high annual interest rates, all of which total approximately $12.6 million over a three-month period and will yield a generous 32.8% annualized rate of return, the DIP Lenders, subject to entry of the Proposed Final Order, seek 37.5% of all net proceeds (after payment of secured, administrative, and priority claims) generated by the Debtors’ estates from a sale of their assets, whether that be through a going concern or liquidation sale. Such ‘Enhancement Fee’ is payable only after the DIP Facility has been paid in full, inclusive of the refinanced Prepetition ABL & Term Loan Facility…and various other exorbitant fees and interest charges. In other words, when the DIP Lenders are fully paid after making a 32.8% annualized return and there is no more secured, administrative, or priority debt, they want 37.5% of the remaining value of these estates. That is not market and it would have the further adverse effect of chilling the bidding on the Debtors’ assets. The Enhancement Fee also cannot be justified on account of the DIP Lenders’ risk because it is payable only after the DIP Facility, inclusive of approximately $12.6 million of fees and interest charged thereunder, and all other administrative and priority claims have been paid in full. The Enhancement Fee is an outrageous and offensive ‘profit’ or ‘participation’ interest that is designed to take unfair and undue advantage of the Debtors at the expense of general unsecured creditors.”
Read more Bankruptcy News