š„A Vendor Apocalypseš„
Hot damn: vendors are taking a beating in bankruptcy.
Deep breaths everyone. This week is going to be ā¦ new-sy. There is, among other things, Mondayās inauguration of President Trump amidst a brutal cold front (and a subsequent onslaught of executive orders that are sure to have some people huffing and puffing), the continued fallout of the fires in California, the sure-to-be-gut-wrenching implementation of the first phase of the recently agreed-to ceasefire between Israel and Hamas, and the potential shut down of our beloved and viral TikTok account. Just kidding on that last one: we donāt have that mind-poisoning bullsh*t and you shouldnāt either.
To put your mind at ease, weāve compiled yet another a$$-kicking briefing below for our paying subscribersā-only. Well. Maybe not all of you will feel āat easeā after reading todayās edition. We cover vendor distress amidst another wave of the #retailapocalypse in the Big Lots Inc. and JOANN Inc. bankruptcies and throw in an EV bankruptcy for good measure; we also cover a pair of transportation names and some nerd sh*t. For those of you wondering about the recent bankruptcies of Prospect Medical Holdings Inc. and Mondee Holdings Inc., donāt worry: that coverage is wrapped up but this edition is long AF already. So look for those on Wednesday (which we plan to paywall just to keep yāall on your toes). Without further ado, letās dig in ā¬ļø.
ā”ļøA BIG Messā”ļø
Itās been a hot minute since we checked in on the bankruptcy cases of Big Lots Inc. ($BIGGQ) (āBig Lotsā) and its 18 affiliates (collectively and together with Big Lots, the ādebtorsā), so letās have ourselves a little peek ā¦
This company is an absolute disaster, and the past few months in bankruptcy have been nothing short of sh*tshow after sh*tshow. So, much to our chagrin, welcome to our EIGHTH (!!!) post on this god-awful name, š¬.
To set the table, the last time we scoped out this BIG flaming pile of garbage, the debtorsā chapter 11 cases were at the outset, having filed in the District of Delaware (Judge Stickles) on September 9, 2024. For those so inclined, you can read about our initial post-filing coverage here.*
For the rest of yāall, the debtors filed their cases with $707.5mm in committed DIP financing (including, gulp, a paltry $35mm of new money) and a deal in hand, having locked up Nexus Capital Management LP (āNexusā) as their stalking horse bidder,** which, had that deal ever closed, would have kept between 800 and 900 stores open, paid off the DIP, assumed some liabilities, and left the debtors with a cool $2.5mm to satisfy half a billion or more in claims.
By the time the second day hearing on the DIP financing came āround in late October ā24, this train was already showing LOTS (š) of signs of going off the rails, and several landlords and the official committee of unsecured creditors, represented by McDermott Will & Emery LLP (Darren Azman, Kristin Going, Stacy Lutkus, Natalie Rowles) and Cole Schotz P.C. (Justin Alberto, Stacy Newman, Jack Dougherty) as legal counsel and FTI Consulting, Inc. ($FCN) (Clifford Zucker) as financial advisor (the āUCCā),*** were sounding the alarms about mundane details like administrative solvency.
The UCC had a whole smƶrgĆ„sbord of DIP issues, some typical UCC stuff (waivers, pre-petition debt roll-ups, challenge period of liens, *yawn*), others less so (the budgetās failure to fully pay 503(b)(9) claims).**** Landlords, however, had a narrower complaint: āā¦ [the budget] did not provide any assurance that Stub Rent would be paidā¦,ā which, of course, the UCC b*tched about too.***** For those not in the know, stub rent is one of those damn pesky administrative expenses that have to be paid in full to confirm any BK plan. But the debtors were able to quell those concerns and squeak through the final DIP hearing by revising the final order to provide āfundingā for stub rent payments and giving the debtors āā¦ authority, but not direction, to draw upon any ABL DIP Availability to provide for such funding[.]ā That language is going to come back to bite folks in the a$$, but, whatever, aside from a few dead canaries, nothing seemed amiss, and the court entered the final DIP order on October 22, 2024.
A couple of days later, and after some delay and a modification or two,****** the court also approved the debtorsā bidding procedures on October 25, 2024, officially blessing Nexusās asset purchase agreement (the āNexus APAā) to serve as the stalking horse bid and sending the debtors off ā¦ on a short dash? Whatever it was, it wasnāt a race. Under the procedures, bids were due October 28, which ā¦ *give us a moment, need to pull out a calendar* was a whopping three days later, two of which were the weekend. Uhhh, what? No doubt youāll be flabbergasted to learn that not a single person submitted a qualified bid, although Gordon Brothers Retail Partners, LLC (āGBRPā),******* the debtorsā store closing consultant, did drop an unqualified one on the debtors. Beyond its consultant hat, GBRP just happens be to an affiliate of 1903P Loan Agent, LLC (ā1903 Agentā) and 1903 Partners, LLC (together with 1903 Agent, the ā1903 Partiesā), the former of which is the debtorsā pre-petition and DIP term loan agent and both of which are lenders under those facilities and own a majority of that debt.******** So safe to say that bid was submitted solely out of GBRPās own interest in the debtorsā assets, had nothing to do with salvaging the term loan if the Nexus deal ran into a wall (spoiler alert: it did), and these dynamics presented no conflict of interest whatsoever for anyone,š. Christ. Weeks later, the court approved the Nexus sale on November 22.********* During the hearings, the debtors stressed:
ā...it was imperative to swiftly close the Nexus Sale to avoid business deterioration resulting from a prolonged stay in bankruptcy and weakening confidence from the Debtorsā commercial counterparties regarding the Debtorsā financial capacity to continue operating as a going-concern.āWell, that didnāt happen, and Norfolk Southern now celebrates no longer having title to the most recent, Ohio-based train wreck. Hereās the debtorsā post-mortem:
āDespite the Herculean efforts to prepare the estates for the sale transaction, on December 1, 2024, Nexus informed the Debtors that it would need more time to close and identified a new target closing of December 10 or 11, 2024āwhich dates would still permit the Debtors to satisfy the sale closing milestone of December 13, 2024 contemplated by the Debtorsā DIP Facilities ā¦ However, on December 5, 2024, the Debtors received a letter from Nexus notifying the Debtors that the minimum asset value closing condition set forth in ā¦ the Nexus APA would not be satisfied ā¦ [and] caution[ing] that āthere [was] a significant capital needā in order to close the Nexus Sale ā¦ The Debtorsā advisors were subsequently informed by Nexusās advisors that this āsignificant capital needā was approximately $75 million.ā (emphasis added).SEVENTY-FIVE. MILLION. DOLLARS! Put another way, the debtors only needed roundabouts 214% of the new money DIP to get to a close. Smoke starting to billow up, it was clearly time to contingency plan ā¦ or at least give some thought to what happens if the Nexus sale falls apart.
LOL, you wish. No, the business judgment rule yearns to be tested, and having 1,000% certainty that debtorsā counsel Davis Polk & Wardwell LLPās (Brian Resnick, Adam Shpeen, Stephen Piraino, Ethan Stern) pre-filing decks included a bakerās dozen or more slides on that topic, this management team wasnāt going to simply let that value walk out the door. Seemingly believing that the cash could be scrounged up pretty easily ā perhaps by digging between the cushions of the debtorsā stylish, yet subtle, eye-catching, but accessible, sofa offerings ā the debtors doubled down and āā¦committed their full efforts to assist Nexus in identifying and engaging with potential additional sources of financing [and] ā¦ in their business judgment and with repeated assurances from Nexus that it was working to close the Nexus Sale, continued to pursue consummation of the Nexus Sale.ā
Meanwhile, the DIP lenders had noticed all the birds had stopped chirping. Hereās a live look at the DIP lenders as events unfolded:
The response was all too predictable. Per the debtors:
āā¦the DIP Lenders and their advisors were advising that the Debtors should seriously consider the parallel alternative path of commencing Store Closing Sales at all of the Debtorsā stores.āA week passed, and things found new ways to get worse. On December 14, (i) the DIP lenders sent the debtors a notice of DIP default because the sale still hadnāt closed, and (ii) Nexus informed the debtors āā¦that closing the Nexus Sale prior to the Nexus APA Outside Date [of December 31] was very unlikely and that Nexus did not see a realistic path to doing so.ā At long last, the debtors awoke from their slumber. After a quick cup of coffee and a morning constitutional, they realized that the lenders had been right all along and gifted their employees a holiday treat.
Thatās right, the debtors decided to light the business on fire and pivoted to an all-store closing process.
While they were getting busy ruining the holidays for, and lives of, their ~27,700 employees, GBRP had saddled up with a counterparty, Variety Wholesalers (āVarietyā), and came back āround with a revised bid on December 15, which was based on the Nexus APA and contemplated (i) payment in full of the DIP (which, of course it did, because a good piece of it was held by GBRPās buds, the 1903 Parties, and maximizing return on the term loan was mission critical), (ii) the preservation by Variety of at least 200 stores and upwards of 400 and, on top of that, a distribution center or two, (iii) the potential ā Variety aināt in the promise-making business ā of continued employment for āthousandsā of fortunate souls, (iv) the payment of āanticipatedā go-forward administrative expenses, and (v) the payment of stub rent and some other administrative expenses, which would be funded by the proceeds of tens of millions of dollars worth of postpetition goods delivered by vendors who continued to support the debtors. Bet you like that, donātcha, vendors! All in, a sh*t sandwich compared to the Nexus deal, but we reckon the debtors thought it made for better PR than sending every single employee to the breadline. But the iās hadnāt been dotted nor the tās crossed, so they still had some wood to chop.
Right around the time the debtors received GBRPās bid, (i) landlords took note that deposits for September stub rent were still curiously missing from their bank accounts and asked the court to hold a status conference, and (ii) the UCC filed a motion to compel payment of that stub rent and 503(b)(9) claims or, alternatively, convert the cases to chapter 7s.
Keenly interested in learning more about this burning trash heap, the court teed them up for a December 19, 2024 hearing. What did the debtors tell us at that hearing? Nothing we couldnāt have guessed. The cases were a total f*cking disaster, no one was happy ā in fact, most were quite pissed off, the debtors had no budget or clear path forward, stub rent hadnāt been paid (remember that language ā¬ļø that resolved the DIP? The debtors took the position that āfundingā and āauthority, but not directionā meant f*ck-all, nothing required actual payment), administrative expenses were growing on the daily (on which, the court remarked, āā¦I do appreciate, you know, the landlords are taking a big risk here and so are the other administrative creditors, including professionals, in this case.ā), and GUCs were ā how do we put this delicately? ā ABSOLUTELY F*CKED.
In the end, all that really came out of it was the courtās blessing to close all of the debtorsā stores, the scheduling of a follow-up status conference on December 30, 2024, the debtorsā agreement to submit a to-be-agreed cash collateral budget and not to place new orders with vendors, and the UCCās punting of its motion to compel to a date TBD.
Fast forward to Friday, December 27, 2024, and the debtors worked out their deal with GBRP (who entered into a side deal with Variety for the stores and distribution center) and, as if the cases werenāt already enough of a clown show, filed a motion to approve it at the Monday, December 30 hearing ā another three-day period spanning the weekend (anyone noticing a pattern here?), this time smack dab in the middle of the holidays.********** That finalized deal includes all of the details outlined ā¬ļø and a special bonus. Remember how 11 days prior, the court made a remark about the big risk āadministrative creditors, including professionals,ā were taking? Well, the estate professionals put their heads together and came up with an articulate response.
LOL, expecting those holding the pen to take an L? Cāmon now, yāall know better than that! Small vendors and landlords are much better situated to take it on the chin. Anyway, the court obliged the debtors, and everyone got together again on December 30, 2024, and got together they did, both that day and the next. Not to be outdone by Franchise Group, Inc., these hearings were looooooooooooooooooooooong as f*ck. Over TEN HOURS of our lives were sucked away, and weāre never getting them back. And unlike Franchise Groupās, they werenāt even that entertaining! Weād consider filing an admin claim for the suffering we endured, but with the recovery non-professional admin creditors are gonna get, and tossing in two bucks of our own, weād be able to buy a sh*tty cup of gas station coffee.
At the hearing, every admin creditor about to get boned and the US trustee (the āUSTā) had thoughts on notice ā as in, there wasnāt any. When that issue and related discovery concerns were raised by a vendor, Davis Polk actually had the balls to say this out loud:
ā[F]or parties who wish to serve discovery, you know, they were certainly able to in advance of the hearing today.āWhat? When? You filed a motion on a Friday for hearing on Monday. This sh*t can only be said in bankruptcy court ā any other court would laugh these jokers right out of the room. Weāll spare you a few details, but Judge Stickles concluded that some business-day discovery was warranted and kicked everything out ā¦ by one day, giving creditors and the UST the option of deposing the debtorsā witness that evening or early the next morning and otherwise preparing for trial. After what was assuredly a relaxing, sleep-filled night, everyone got back together the next morning. Picking up where they left off, the debtors made a handful of points: (i) the GBRP-Variety deal was the best deal the debtors were going to get, (ii) the UCC supported it, (iii) liquidating was a straight-up worse alternative, and (iv) the payment of professionals was no biggie because the DIPās carve-out and escrow funding already took care of them (again, must be nice to have that pen in hand, and certainly not one of the reasons the UCC supported the deal).
The UST and vendors made their arguments too: the deal needed additional funding for administrative expenses, including the payment of UST fees (which will screech to a halt the week of January 25, 2025), the hearing should be kicked out, or the cases converted to 7 because the debtors shouldnāt be allowed to pick and choose which admin creditors get paid. But itās bankruptcy court, and while Delawareās admittedly less egregious than other venues, debtors generally get away with waving their arms while screaming the sky is falling. The court approved the sale, of course, and it closed on January 3, 2025.
Since then, creditors have carpet bombed the debtorsā docket with requests for payment of their administrative expenses. Weāre not kidding ā over 50 motions have been filed so far, asserting millions and millions of dollars worth of claims, and the figure keeps growing.*********** Topping off this sh*t sundae, Nexus dropped a couple juicy cherries in the form of two motions: one to compel the debtors to repay Nexus for its expenses and return its $2.5mm deposit and another to compel the debtors to pay Nexus its $7.5mm break-up fee after the GBRP sale closed, all as required under the Nexus APA.
This thing is going to convert to 7, thereās no way around it. Taking one landlord at his word, the magnitude of administrative expenses is pushing upwards of $300mm, all accrued within three and a half months. The next hearing is slated for January 21, 2025, and weāll keep you posted as this mound of refuse burns out.
Best of luck to all vendors, landlords, and everyone else left holding the bag. Doubtless, the estatesā lawyers, bankers, and financial advisors are sending thoughts and prayers.
* We specify āpost-filingā because we saw this train wreck coming from a mile away. Our six prior updates can be found here: Part I, Part II, Part III, Part IIIĀ½, Part IV, and Part V.
** Nexus is represented by Kirkland & Ellis LLP (Christopher Marcus, Douglas Ryder, Nicholas Adzima) as legal counsel.
*** The UCC is composed of (i) Realty Income Corporation, (ii) Blue Owl Real Estate Capital LLC, (iii) Americaās Realty, LLC, (iv) Zest Garden Limited, (v) NCR Voyix Corporation (f/k/a NCR Corporation), (vi) Twin Star International, Inc., (vii) Everstar Merchandise Co., Limited.
**** 503(b)(9) claims are pre-petition claims for the value of ordinary course goods used in the business and sold to the debtor in the 20 days before the petition date. Like stub rent, theyāre entitled to administrative priority. If any of this is new-to-you info, weāll suggest perusing 11 U.S.C. Ā§ 503(b)(9).
***** āStub rentā is the portion of rent allocable to the period between the petition date and the next date a rent payment is due under the lease.
****** Judge Stickles ā ever the stickler ā sustained the US trusteeās objection to the proposed āsuperpriorityā status of Nexusā bid protections because, you know, thereās literally no authority or support for that in the Bankruptcy Code. Nexus and the debtors lived with it because, like, what else were they gonna do about it?
******* GBRP is represented by Riemer & Braunstein LLP (Steven Fox) and Ashby & Geddes, P.A. (Gregory Taylor) as legal counsel.
******** 1903 Agent is represented by Otterbourg, P.C. (Chad Simon, James Drew) and Richards, Layton & Finger, P.A. (Mark Collins, John Knight, Zachary Javorsky) as legal counsel. Given the affiliations of GBRP and 1903 Agent and how this disaster played out, weāll go ahead and assume Riemer and Otterbourg have been ācoordinatingā directly or through individuals at Gordon Brothers who don a few different hats.
********* The court held two days of hearings stretching over six hours regarding the sale of D&O claims to Nexus and a couple requests to extend the challenge period under the DIP. To make short shrift of it, the court excised the claims of non-go-forward D&Os but allowed the rest to be sold, which Nexus was good with, and denied the requests.
********** During the interlude, Nexus exited stage left by delivering a coup de grĆ¢ce letter to the debtors on December 21 that put the Nexus APA out of its misery.
***********We were somewhat amused to see that chapter 11 bankruptcy alum Thrasio LLC is among them. It appears that the great online Amazon killer and trinket aggregator actually uses Big Lots as an aftermarket reseller, lol.
š„JOANNsinā for Another BIG Mess?š„
Recently, an Ohio-based brick-and-mortar retailer with hundreds of locations and north of half a billion dollars of funded debt filed chapter 11 cases in the District of Delaware looking to pursue a transaction with an at-hand stalking horse supported by a prepetition agent and lender on a truncated timeline.
Sensing dĆ©jĆ vu?
We wouldnāt fault you if you were but we already covered Big Lots š. Enter JOANN, Inc. (āJOANNā) and 12 affiliates (collectively and together with JOANN, the ādebtors,ā and together with their sole foreign non-debtor affiliate, the ācompanyā).
On January 15, 2025 and after having emerged from bankruptcy a short 8.5 months prior on April 30, 2024, the formerly-Leonard Green & Partners, L.P. (āLGPā)-owned* debtors filed brand spanking new chapter 11 bankruptcy cases in that Honorable Court (Judge Goldblatt, again), hoping to gain approval by no later than February 22, 2025 of an agreement with Big Lots-buyer Gordon Brothers Retail Partners, LLC (āGBRPā).** GBRP also happens to be an affiliate of the aforementioned agent and lender under the debtorsā FILO facility, 1903P Loan Agent, LLC (ā1903 Agentā) and 1903 Partners, LLC (together with 1903 Agent, the ā1903 Partiesā), which isnāt sus at all. Man, these three sure have been gallivanting around in quite a few recent bankruptcy cases.*** If this keeps up, weāll be dangerously close to being able to write these articles Mad Libs-style.