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In a motion [Docket No. 23] requesting that a combined hearing to approve the adequacy of the Disclosure Statement and confirm the Plan be held on February 4, 2019, the Debtors note both (i) the urgency of their need to complete their pre-packaged restructuring and (ii) the 100% support of the three impaired, voting classes (eg holders of FILO Claims in Class 4, holders of First Lien Claims in Class 5, and holders of Second Lien Claims in Class 6). The motion states, “To preserve value for the benefit of the Debtors’ estates, the Debtors need to proceed swiftly to confirmation…and minimize the effects of the Debtors’ chapter 11 cases on the value of the Debtors’ brand—a critical component of the value of the Debtors’ businesses. Here, unless the Plan is consummated as soon as possible, the Debtors may lack sufficient liquidity to operate their business. Failure to obtain confirmation of the Plan on the proposed truncated timeline would severely affect the Debtors’ operational cash flow, require the Debtors to negotiate costly debtor-in-possession financing, and may jeopardize the recoveries contemplated by the restructuring support agreement (the “Restructuring Support Agreement”)….To consummate the Plan as soon as possible, the Debtors and their stakeholders invested significant attention to achieving consensus prepetition. As a result, among other things, all non-funded debt claims will ride through the Debtors’ bankruptcy unimpaired, 100 percent of voting creditors that returned ballots have voted to accept the Plan….Accordingly, the Debtors respectfully submit that the proposed truncated confirmation schedule is both appropriate and necessary in light of the unique circumstances of these chapter 11 cases. It would be detrimental for all parties in interest if any delays prevented the Debtors from expeditiously consummating the Plan.”
It will be an extremely busy day in Judge Robert Drain’s courtroom, as FULLBEAUTY will share Judge Drain’s attention with Sears Holdings Corp, which has a critical, and contentious sale hearing scheduled in respect of the $5.4bn going concern sale of Sears to Edward Lampert’s ESL Investments’ Inc. For today at least, White Plains, New York is the center of the retail apocalypse.
Summary of Pre-packaged Plan
The Plan implements a pre-packaged restructuring agreed to among the Debtors and the Debtors’ major stakeholders, including an ad hoc committee comprised of holders of approximately 99% of the First Lien Claims, an ad hoc committee comprised of holders of approximately 95% of holders of the Second Lien Claims, and the Debtors’ prepetition private equity sponsors (Apax and Charlesbank, see further below) and certain of their affiliated entities and investment funds, which restructuring will result in a significant deleveraging of the Debtors’ capital structure, ie a reduction in debt of between $850mn and $900mn.
FULLBEAUTY states that the benefits of the Plan include:
- Conversion of approximately $782 million of the First Lien Credit Facility to a combination of equity, $175 million of a new first lien facility and up to $35 million of a new junior loan
- Conversion of approximately $345 million of the Second Lien Credit Facility to a combination of equity, warrants, and $15 million of a new junior loan
- Prompt emergence from Chapter 11, and
- A new money capital infusion in the form of a $30 million exit first lien facility, backstopped by certain of the First Lien Lenders.
- Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
- Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
- Class 3 (“ABL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
- Class 4 (“FILO Claims”) is impaired and entitled to vote on the Plan. Holders of FILO claims are expected to receive (at the Debtors’ election) either the pro rata share of (i) $75 million of the New First Lien Term Loan and payment of any accrued but unpaid interest, fees, and expenses in Cash or (ii) $75 million plus any accrued but unpaid interest, fees, and expenses of the New First Lien Term Loan. Expected recovery is 100%; the Debtors further estimate that recovery in a liquidation would be 38% – 43%.
- Class 5 (“First Lien Claims”) is impaired and entitled to vote on the Plan. Holders First Lien claims will receive their pro rata share of (i) $175 million of the New First Lien Term Loan and (ii) subject to Article III.B.6.c of the Plan, 87.5% of the New Common Stock, subject to dilution by the Option Rights, Warrants, and Management Incentive Plan; provided that a Holder of an Allowed First Lien Claim may check the applicable box on the Class 5 Ballot to receive in lieu of New Common Stock (which forfeited shares shall be distributed pro rata to non-electing Holders ) a principal amount of the New Junior Loan that is equal to 85% of the Exchange Benchmark Value of such Holder’s original New Common Stock distribution (i.e., a 15% discount to the Exchange Benchmark Value of its original New Common Stock distribution); provided, further, that electing Holders of Allowed First Lien Claims shall not receive more than $35 million in aggregate principal amount of the New Junior Loan. Expected recovery for holders electing the Junior Loan is 28.9%-34.4% and for holders not electing the Junior Loan 27.6%-41.3%. The Debtors further estimate that recovery in a liquidation would be 7%-12%.
- Class 6 (“Second Lien Claims”) is impaired and entitled to vote on the Plan. If Class 6 votes to accept the Plan, holders of Second Lien claims will be entitled to their pro rata share of $15mn of the New Junior Loan; (B) 10% of the New Common Stock, subject to dilution by the Option Rights, Warrants, and the Management Incentive Plan; and (C) the Second Lien Warrant Package described in the Warrant Documents. If Class 6 votes to reject the Plan, no distribution shall be received under the Plan, and the 10% of the New Common Stock shall be reallocated to Allowed First Lien Claims in Class 5. Expected recovery for holders voting to accept the Plan is 4.8% – 7.3%; the Debtors further estimate that recovery in a liquidation would be 0%.
- Class 7 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%. Expected recovery under a liquidation would be 0%.
- Class 8 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Expected recovery is 100% or 0%.
- Class 9 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Expected recovery is 0%.
- Class 10 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Expected recovery is 100% or 0%.
The Disclosure Statement notes, ““In addition to the substantial debt service obligations required under the Prepetition Loan Documents, FullBeauty faced a number of operational hurdles and a generally depressed retail apparel market in the months and years leading up to their decision to commence the Chapter 11 Cases. In particular, FullBeauty has suffered from recent merchandising issues that have contributed to the decline in EBITDA, which include (a) rapid untested changes to product strategy, (b) challenged inventory and sales processes implementation, and (c) inventory and pricing controls. First, FullBeauty’s product strategy suffered from untested assortment and creative initiatives that proved to have been implemented too rapidly. Specifically, FullBeauty’s attempt to rationalize its product offering by eliminating underselling products resulted in lower profit margins. Additionally, FullBeauty revised its creative materials and catalogs to reflect an alternative target customer demographic. Unfortunately, this approach inadvertently disengaged FullBeauty’s core customers who no longer identified with models and suggested customer base, resulting in a dramatic decline in sales. Second, FullBeauty’s inventory procurement and sales processes have suffered from an outdated merchandise planning system and fragmented competing eCommerce platforms, respectively. Third, profit margins were eroded by (x) changes in product assortment architecture, (y) increased sales, promotions, and discounts to clear underperforming inventory, and (z) promotion missteps related to implementation of FullBeauty’s new eCommerce platform. In addition to these operational hurdles, FullBeauty has also faced competition from online retail giant Amazon, Inc. and retail chains, including Walmart Inc. and Kohl’s Corporation, that have recently entered the plus-size clothing space.”
On January 3, 2019, FULLBEAUTY announced that it had agreed a comprehensive restructuring support agreement (the “RSA”) with key stakeholders including (i) its current equity sponsors, Apax Partners (“Apax”) and Charlesbank Capital Partners (“Charlesbank,” and together with Apax, the “Sponsors”), (ii) holders of 100% of its FILO term loan claims, (iii) holders of over 99% of its first lien term loan claims (the “First Lien Lenders”) and (iv) holders of over 95% of its second lien term loan claims (the “Second Lien Lenders”). The Company’s Petition discloses that Apax holds 69.6% of the Company’s equity and that Charlesbank continues to hold 26.4%.
Exhibits attached to the Disclosure Statement
- Exhibit A: Joint Prepackaged Chapter 11 Plan of Reorganization
- Exhibit B: Restructuring Support Agreement (and exhibits thereto, including the Restructuring Term Sheet, term sheets regarding the Exit New Money Facility, New First Lien Term Loan, New Junior Debt, warrants, Purchase Option, and Governance)
- Exhibit C: Liquidation Analysis
- Exhibit D: Valuation Analysis
- Exhibit E: Financial Projections
- Exhibit F: Corporate Organizational Chart
- Exhibit A: Form of Exit ABL Credit Agreement
- Exhibit B: Form of New First Lien Term Loan Credit Agreement
- Exhibit C: Form of New Junior Loan Credit Agreement
- Exhibit D: New Organizational Documents for the Reorganized Debtors
- Exhibit E: Form of New Stockholders Agreement
- Exhibit F: Form of Warrant Agreement, (vii) Exhibit G: Management Incentive Plan Term Sheet
- Exhibit H: Identities of the New Board Members of the Reorganized Debtors
- Exhibit I: Form of Advisory Services Agreement
- Exhibit J: Form of Purchase Option Agreement
- Exhibit K: Restructuring Transactions Memorandum
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