Nine West Holdings – Amended Plan and Disclosure Statement Detail Sycamore Settlement and Projected Recoveries, Showdown with Unsecured Creditors Still Looms

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October 17, 2018 – Nine West Holdings (“NWHI”) filed with the Court a First Amended Joint Plan of Reorganization [Docket No. 749] and related Disclosure Statement [Docket No.750].
          Press Release

In a press release announcing the filing, the Company stated, “The Plan is accompanied by an amended and restated Restructuring Support Agreement, which has been signed by parties that hold or control over 85% of its secured term debt, over 80% of its unsecured term debt, and the Company’s indirect equity owners….The Plan reduces the Company’s pre-bankruptcy debt obligations by more than $1 billion.  The Plan further provides significant near-term cash recoveries to stakeholders through the settlement of potential claims and causes of action against the Company’s indirect equity owners that have been at the center of creditor investigations during the Company’s bankruptcy cases.  These claims will be settled for a $105 million cash contribution by the indirect equity owners to the Company, which cash will be distributed to the Company’s unsecured creditors.“

          UCC vs. NWHI and Sycamore?

The press release fails to mention that there remain unsettled potential claims relating to the “creditor investigations” that are potentially exacerbated by the very settlements that the Company has disclosed in the amended Plan and Disclosure Statement. On October 13, 2018, NWHI’s Official Committee of Unsecured Creditors (the “UCC”) requested Court authority to commence and prosecute certain claims on behalf of the NWHI estate and exclusive settlement authority in respect of such claims [Docket No. 735]. As previously reported, “The Committee seeks leave to prosecute fraudulent transfer and other claims for well over $1 billion (the ‘Proposed Claims’) – excluding pre-judgment interest of about $350 million (and growing) – that Debtor Nine West Holdings, Inc. (‘NWHI’) has unjustifiably refused to assert against Sycamore and other potential defendants….The Committee understands that the Debtors are likely to release the claims against Sycamore for a small fraction of their value, before even filing a complaint detailing those claims….NWHI is entitled to recover well over $1 billion from Sycamore, not including prejudgment interest, based on Sycamore’s fraudulent transfers and other misconduct described in this Motion and in the Proposed Complaint. In addition, the liens and obligations NWHI incurred in connection with more than $800 million in LBO debt should be avoided, with all payments of interest on the LBO Debt made by or on behalf of NWHI returned to the estate. NWHI also is entitled to recover damages for breach of fiduciary duty from Sycamore and the Jones Inc. directors, and to recover from the directors the full amount of transfers made to Jones Inc.’s shareholders (about $1.2 billion)….Allowing the Debtors to release these extraordinarily valuable claims in exchange for the relatively paltry sum the Debtors previously appeared poised to accept would constitute yet another windfall for Sycamore.” 

           Disclosure Statement

The Disclosure statement notes, “The proposed Plan achieves a balance sheet restructuring that maximizes the value of the Debtors’ businesses and potential litigation assets stemming from their 2014 going-private transaction (the ‘2014 Transaction’) and related carve-out transactions (the ‘Carve-Out Transactions’). The proposed Plan is the culmination of more than a year of negotiations and related diligence and investigations into the Debtors’ assets by, among others, the Debtors’ independent directors and their advisors, the Secured Term Loan Lenders, the Unsecured Term Loan Lenders, and certain holders of the Debtors’ unsecured notes. Importantly, the proposed Plan contemplates a global settlement of claims and causes of action among the Debtors, the Debtors’ secured lenders, the Debtors’ unsecured term lenders, and the Debtors’ private equity owners.

Through these settlements, the Plan provides significant recoveries to the Debtors’ unsecured noteholders and other unsecured creditors at NWHI, who likely otherwise would receive minimal, if any, recovery. In addition, the proposed Plan maximizes the value of the Debtors’ business assets to ensure significant recoveries for all creditor stakeholders at each of the Debtors. The Plan provides this value by settling estate claims and causes of action against Sycamore Partners Management, L.P. (together, with its affiliates, ‘Sycamore’ or the ‘Sponsor’) and certain affiliates of KKR Credit Advisors (US) LLC (collectively, ‘KKR’ or the ‘Minority Equity Holders’), the Debtors’ indirect equity owners, on account of the 2014 Transaction and Carve-Out Transactions, and any other potential claims arising on or before the effective date of the Plan (the ‘Effective Date’). This settlement (the ‘Equity Holders Settlement’) requires the Debtors’ indirect equity owners to make a cash contribution to the Debtors on the Effective Date of $105,000,000, direct the Debtors’ indirect parent company, Nine West Topco LLC, to unwind a worthless stock deduction taken on its 2017 U.S. Partnership tax return (to the extent not already unwound), and also requires Sycamore to cause its portfolio company, Belk, Inc., to enter into a 3-year commitment agreement with the Reorganized Debtors, strengthening the Debtors’ business value and ability to raise third-party financing to fund distributions to the Secured Term Loan Lenders, DIP Lenders (each as defined herein), and administrative and statutory priority creditors.

Rather than exposing the Debtors’ business assets to potentially value-destructive litigation against Sycamore—the owner of one of the Debtors’ most significant customers, Belk, Inc.—the Plan provides for substantial near-term cash contributions from Sycamore and KKR to be provided directly to the Debtors’ creditors, and provides protection for the equity value in the Debtors’ business assets. Through the Equity Holders Settlement, the Debtors have stabilized their business value while at the same time bringing in a significant cash payment to provide their creditors with nearterm recoveries without the risk of lengthy and speculative litigation that could ultimately result is lesser recoveries. The Plan delivers additional value to NWHI’s creditors through the resolution of intercreditor and intercompany disputes that would otherwise give rise to burdensome, lengthy, and value-destructive litigation. Such litigation, as more fully described herein, which primarily would be among the Debtors’ structurally senior unsecured term loan lenders (the ‘Unsecured Term Loan Lenders’) and NWHI’s unsecured noteholders (the ‘Noteholders’), could delay the Debtors’ path to emergence or, at the very least, delay the timing of distributions to the Debtors’ creditors. Indeed, taken to its extreme, the costs of this litigation could result in the liquidation of the Debtors’ business assets. The Debtors therefore engaged in extensive, hard-fought negotiations with their creditor groups, obtaining significant concessions from the Unsecured Term Loan Lenders on account of potential claims and rights that their subsidiary guarantors may have against NWHI as a result of transactions that have transpired both before and during these chapter 11 cases, which would leave little, if any, value for creditors of NWHI.”

            Projected Recoveries
In detail provided as to projected recoveries, the Disclosure Statement notes, “As a result of the Equity Holders Settlement and the intercreditor and intercompany settlements, the Plan provides the following recoveries: 

  • Unsecured Term Loan Lenders will receive their pro rata share of: (i) 92.5% of the Reorganized Debtors’ equity, subject to dilution for equity reserved for a management equity incentive plan and subject to adjustment downward if the Debtors raise cash in excess of the Debtors’ minimum cash requirements to fund the cash recoveries and other sources and uses under the Plan, (ii) One-third of the proceeds of the Equity Holders Settlement, and (iii) the aggregate cash proceeds resulting from the ‘New Secured Facility Upsize Amount’ (i.e., the cash the Company is able to raise above the necessary Plan sources and uses), if any. 
  • 2034 Noteholders and 2019 Noteholders, and holders of unsecured claims against NWHI (other than the Unsecured Term Loan Lenders) will receive their pro rata share of: (i) 7.5% of the Reorganized Debtors’ equity, subject to dilution for equity reserved for a management equity incentive plan, less any equity to be distributed to the non-NWHI general unsecured creditors, and subject to adjustment upward if the Debtors raise cash in excess of the Debtors’ minimum cash requirements to fund the cash recoveries and other sources and uses under the Plan, (ii) warrants for 20% of the Reorganized Debtors’ equity, subject to dilution for the management incentive plan, exercisable at a total enterprise value of $650 million for the Reorganized  Debtors, subject to the terms and conditions set forth in the Plan and the warrant agreement, and (iii) two-thirds of the cash proceeds of the Equity Holders Settlement.
  • Holders of unsecured claims against the Debtors’ operating subsidiaries will receive their pro rata share of [ ]% of the Reorganized Debtors’ equity (depending on the applicable Debtor subsidiary), which amount is in compliance with section 1129 of the Bankruptcy Code. 
  • The Secured Term Loan Lenders will receive payment in full in cash with the waiver of default interest, and the Debtors’ DIP Lenders will receive payment in full in cash. 
The Plan is subject to the Debtors’ fiduciary duties to maximize the value of their estates. The Debtors will therefore continue to review all options for their primary business and litigation assets, and remain willing and able to talk to all parties regarding alternative viable and feasible chapter 11 plans. Indeed, the Debtors have a strong fiduciary out in their agreement supporting this proposed Plan to allow the Debtors to consider all options. The Plan is supported by more than 85 percent of the Secured Term Loan Lenders and more than 80 percent of the Unsecured Term Loan Lenders. The proposed Plan maximizes creditor recoveries, meaningfully reduces the Debtors’ aggregate funded debt (by more than $900 million over their funded debt obligations as of the commencement of these chapter 11 cases), and best positions the Debtors for future success. The Debtors encourage you to vote to accept the Plan.”

 A hearing has been scheduled for November 7, 2018, to consider approval of the Disclosure Statement.

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