Fleetwood Acquisition Corp. – Manufacturer of Retail Fixtures Files for Bankruptcy After Annual Revenues Drop 50%, Points Finger Squarely at China Tariffs

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November 4, 2019 − Fleetwood Acquisition Corp. and two affiliated Debtors (d/b/a Fleetwood Fixtures, “Fleetwood” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12330. The Debtors, a provider of custom retail fixtures, furnishings and related strategic services, are represented by Erin R. Fay of Bayard P.A. Further board-authorized engagements include Stretto as claims agent. 

The Debtors’ lead petition notes between 200 and 1,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $50.0mn and $100.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Blatt Construction Inc ($561k professional services claim), (ii) B&L Wood Creations ($455k trade debt) and (iii) Commercial Decor Group ($398k trade debt).

Chapter 11 Objectives

The Diaz Declaration (defined below) provides: "The Debtors intend to utilize the chapter 11 process to further right-size and streamline their businesses with the goal of emerging as a profitable enterprise to service their customers, maintain their employees and act as a go-forward business partner with their suppliers. As a part of this process and to maximize value, the Debtors intend to institute procedures as quickly as possible to liquidate certain inventory, raw materials, and equipment at their Pennsylvania location."

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Diaz Declaration”) [Docket No. 13], Octavio Diaz, the Debtors' Chief Restructuring Officer, detailed the events leading to Fleetwood’s Chapter 11 filing. The Diaz Declaration points the finger for the Debtors' slip into bankruptcy squarely at the recently imposed China tariffs, relaying the input of retail clients that those tariffs had necessitated changes in planned spending; and also noting that its own manufacturing costs had been driven up by those tariffs. Curiously, the declaration does not even mention the "retail apocalypse," the combination of many retail failures and the subsequent appearance on the market of cut-price fixtures further to store closings, would intuitively have contributed to operational difficulties…and the inevitably attendant liquidity problems…for the Debtors. Apparently not.

The Diaz Declaration states: "…in early 2019, some of the Debtors’ customers unexpectedly began delaying orders and pushing out project timelines. Many of those customers are retailers who reported that the newly instituted China tariffs were negatively impacting their sales and profit margin projections. This, in turn, led such customers to slow their store expansion and refurbishment plans, defer new projects indefinitely, and reduce the scope of existing projects. This caused a significant decline in the Debtors’ revenue. Indeed, the Debtors project a combined decline of approximately 50% in revenues from 2018 to 2019. 

Customers also began to delay payment or to challenge invoices in unusual ways, presumably to address their own cash flow issues. At the same time, the Debtors’ liabilities to suppliers and internal overhead ballooned as the Debtors continued to work to fulfill customer orders for which payment was now being delayed or withheld."

The impact of the China tariffs on the Debtors was not, however, just on the sales side; it was also on the buy side.

The Diaz Declaration continues: “At the same time, the Debtors’ overhead expenses increased due to the Fleetwood expansion and certain of the materials utilized by the Debtors became more expensive due to the tariffs.

The combined effect of these circumstances on the Debtors’ operations and balance sheet led the Debtors to look for additional financing in recent months. After exhausting this process without locating a financing source, the Debtors determined that their best path forward was to effect an operational and financial restructuring under chapter 11 of the Bankruptcy Code.”

Pre-petition Capital Structure

Debt

  • Revolving Credit and Term Loan Agreement: The Debtors are parties to a September 2014 Revolving Credit and Term Loan Agreement with the Prepetition Secured Lender. As of the Petition date, there is at least $51,259,427 in principal and interest outstanding under this facility which is in default. The Prepetition Secured Lender (ie Fixtures Holdings, L.P. ) has affirmatively consented to the proposed use of cash collateral in connection with the proposed cash collateral order. 
  • Term Loan Agreement: The Debtors are parties to a September 2014 and Term Loan Agreement, with Brookside Mezzanine Fund III, L.P. (“Brookside”). As of the Petition date, there is approximately $9,826,845 in principal and interest outstanding under this loan. 
  • Amended and Restated Subordinated Promissory Note: The Debtors are parties to a May 2017 Amended and Restated Subordinated Promissory Note with the Prepetition Secured Lender (as successor in interest to Grey Mountain Partners Fund III Holdings, L.P.). As of the Petition date, there is approximately $8,756,074 in principal and interest outstanding under the note. 
  • The senior priority of the Prepetition Secured Debt is dictated by an Intercreditor Agreement, by and among the Debtors, the Prepetition Secured Lender, and Brookside, dated as of September 19, 2014. 
  • As of the Petition Date, the Debtors estimate that they owe approximately $7.4 million in trade debt.

Equity

  • Fleetwood and High Country (defined below) are 100% owned by Acquisition. Acquisition is owned 93% by the Prepetition Secured Lender, 4.23% by Brookside, and 2.23% by Citizens Bank of Pennsylvania, with remaining small amounts of equity owned by individuals.

About the Debtors

Fleetwood Industries, Inc. (d/b/a Fleetwood Fixtures) (“Fleetwood”) and High Country Millwork, Inc. (“High Country”) are leading providers of customized fixtures and displays, with decades of experience serving a wide variety of customers in the retail and hospitality industries. Fleetwood and High Country are full service fixturing companies beginning with creative and collaborative design services and continuing through the manufacturing and installation processes. 

The companies were consolidated under Acquisition in 2014 and, following certain operational and financing restructuring initiatives in the following years, the companies’ performance substantially improved. By 2018, the companies had substantially stabilized their operations and together achieved $70 million in sales. Fleetwood invested heavily in a new manufacturing space in 2018-2019 to service its growing business and customer needs.

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