November 19, 2018
We’ve previously written about PA-based David’s Bridal Inc. here and here and here: this bankruptcy has been a long time coming. But only recently has it come to light that there might be a consensual deal attached to any potential bankruptcy filing and, per the reports, that does appear to be the case. The company (and certain affiliates) filed for bankruptcy in the District of Delaware with a prepackaged plan of reorganization. If this flows through as planned (with a hoped for “Effective Date” of January 14), this will be a positive result that leaves trade vendors and employees paid in full and brides-to-be with their gowns without disruption. Thank G-d. In a day with rage all over the place, the last thing we need is more stress out there. And with 311 stores and 9,260 employees and given the general retail environment, consensual deals cannot be taken for granted.
While there is an underlying current of retail malaise here, this is primarily a balance sheet story. Why? Well…c’mon now…you know the answer: PRIVATE EQUITY!! In 2012, affiliates of Clayton, Dubilier & Rice, LLC (“CD&R”) purchased the company from another private equity firm, Leonard Green & Partners, L.P., which had previously purchased the company from Federated Department Stores Inc. Leonard Green 1. CD&R 0. Per the Company:
The Debtors’ current capital structure was put into place on or about October 11, 2012 as part of CD&R’s acquisition of David’s Bridal and certain of its affiliates. As of the Petition Date, the Company’s debt obligations include (i) approximately $25.7 million in drawn commitments under the Prepetition ABL Agreement; (ii) an estimated $481.2 million in outstanding principal obligations under the Prepetition Term Loan Agreement; and (iii) an estimated $270.0 million in outstanding principal obligations under the Unsecured Notes.
And here they are: in bankruptcy court due to too much debt and upcoming maturities. Bravo CD&R. The company also notes:
Despite the significant headwinds facing the brick-and-mortar retail industry, over the past several years, the Debtors have experienced steady financial performance and only modest loss of market share. The vast majority of David’s Bridal stores generate positive EBITDA, and the Debtors have historically generated stable operating cash flows. The most significant factor leading to the commencement of these chapter 11 cases is the amount of debt on the Debtors’ balance sheet, most of which will mature with the next 12 months.
David’s Bridal reported adjusted EBITDA of approximately $83.0 million for the fiscal year ended December 31, 2017 and of approximately $77.7 million for the first nine months of 2018. In fact, the vast majority of the stores in their fleet reportedly have profitable 4-wall EBITDA. So…uh…maybe we were…gulp…wrong…and maybe millennials actually do want wedding dresses…? 😳😳
Significantly, this IS a retail bankruptcy but this is NOT an “Amazon Effect” story. In fact, David’s Bridal MAKES money off of Amazon Inc. ($AMZN) and others, through an “affiliate relationship” pursuant to which David’s Bridal earns revenue by referring traffic to Amazon (and other sites like Men’s Wearhouse, Macy’s, Shutterfly, Marriott and Carnival).
The upshot of all of this is that the company claims it will dramatically cut the $777mm of funded debt. The company notes:
The restructuring contemplates a substantial deleveraging that will reduce the Debtors’ funded indebtedness from approximately $777 million to approximately $343 million (based upon currently anticipated borrowings on under an exit ABL facility at the Effective Date, which are subject to change).
The prepetition ABL lenders will roll their prepetition facility into a $125mm ABL DIP credit facility;
The prepetition term lenders will provide a $60mm term loan DIP credit facility and swap their $481mm term loan for (i) the “vast majority” (75.5%) of the reorganized company’s common stock, (ii) a new “takeback” exit term loan of around $240-260mm and (iii) rights to participate in a $40-60mm priority exit term loan facility that takes out the DIP term loan and obtain (15%) additional stock;
The prepetition holders of unsecured notes will get the remaining (8.75%) common stock and warrants to capture potential upside; and
CD&R will get themselves a big-a$$ tax writeoff (if this hasn’t been written down already), presumably some angry limited partners, and some legal releases for playing ball in the consensual deal (including by waiving approximately $1mm of accrued management fees and expense reimbursements).
Now, we’re having a hard time figuring out how a $125mm exit ABL facility, $40-60mm in exit priority term loans, and $240-260mm in takeback paper equates to “$343 million” but, well, we guess lawyers draft these declarations, plans and disclosure statements and they ought to be given a reasonable mathematical margin of error. Plus, to be fair, they’re only talking about “funded” indebtedness and so the ABL likely won’t be tapped — as it wasn’t prepetition — to the full extent of availability. Still, they are understating the extent of the post-emergence balance sheet to some degree.
Finally, CD&R is a holder of unsecured notes. Which, per the third bulletpoint above, means that, despite effectively crushing this company with a burdensome amount of debt and driving this sucker into bankruptcy, they will continue to own a piece of the reorganized David’s Bridal going forward. Your wedding, powered by private equity.
As we say over and over again: G-d bankruptcy is beautiful.
Jurisdiction: D. of Delaware (Judge Silverstein)
Capital Structure: $125mm ABL ($25.7mm funded - Bank of America NA), $481mm TL (Bank of America NA), $270mm ‘20 7.75% senior unsecured notes (Wilmington Trust NA)
Legal: Debevoise & Plimpton LLP (M. Natasha Labovitz, Nick Kaluk III, Daniel Stroik, Craig Bruens) & (local) Young Conaway Stargatt & Taylor LLP (Robert Brady, Edmon Morton, Jaime Luton Chapman, Tara Pakrouh)
Financial Advisor: AlixPartners LLP
Investment Banker: Evercore Group LLC (Stephen Goldstein)
Legal: DLA Piper LLP (Richard Chesley, Jamila Willis, Maris Kandestin)
Independent Auditors: KPMG LLP
Claims Agent: Donlin Recano & Company (*click on company name above for free docket access)
Other Parties in Interest:
Prepetition ABL & DIP ABL Agent: Bank of America NA
Legal: Morgan Lewis & Bockius LLP (Julia Frost-Davies, Christopher Carter, Glenn Siegel) & (local) Richards Layton & Finger PA (Mark Collins, Brett Haywood)
DIP TL Agent: Cantor Fitzgerald Securities
Ad Hoc Term Lender Group (AlbaCore Capital LLP, Courage Credit Opportunities Onshore Fund III LP, Courage Credit Opportunities Fund IV LP, Eaton Vance Management, Deutsche Bank AG Cayman Islands Branch, HG Vora Special Opportunities Master Fund Ltd., Rimrock Capital Management LLC, Neuberger Berman Alternative Funds, Sound Point Capital Management, Whitebox Advisors LLC,
Legal: Jones Day (Scott Greenberg, Michael J. Cohen, Nicholas Morin) & (local) Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, Timothy Cairns, Joseph Mulvihill)
Financial Advisor: Greenhill & Co., Inc.
Crossover Lender: Oaktree Capital Management LP (within its Strategic Credit, High Yield and Loan Strategies)
Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Alan Kornberg, John Weber) & (local) Cozen O’Connor PC
Financial Advisor: Moelis & Co.
Supporting Unsecured Noteholder: Solace Capital Partners LP
Legal: Fried Frank Harris Shriver & Jacobson LLP (Brad Scheler, Peter Siroka) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott)
Financial Advisor: FTI Consulting Inc.
Financial Sponsor & Supporting Unsecured Noteholder: Clayton Dubilier & Rice Fund VIII L.P.
Supporting Sponsor: Leonard Green & Partners L.P.
Legal: Cole Schotz P.C. (Norman Pernick, Kate Stickles)