More Mall-Based Retail in Bankruptcy Court
|Aug 7, 2018||Public post|
Ok, so we’re being a bit flip here (as always) but the truth is that in addition to people not going to malls anymore, people have become increasingly comfortable purchasing jewelry over the internet. Don’t believe us? The list of growing Instagram-dominant direct-to-consumer jewelry brands seems to be growing longer than the list of professional athletes President Trump has insulted. There’s Vrai & Oro, Aurate, and several others. When a company is facing this kind of onslaught, it simply cannot be distracted by other externalities like…say, fraud at the parent level. That’s right. Per Reuters back in May:
U.S. jewelry chain Samuels Jewelers has hired a turnaround adviser at the request of its creditors in a bid to avoid the fate of brick-and-mortar retailers that filed for bankruptcy amid intensifying competition, according to people familiar with the matter.
Samuel Jewelers’ action comes as its Indian parent company, Gitanjali Gems Ltd, finds itself in legal hot water. Gitanjali’s chairman, Mehul Choksi, was accused by state-run Punjab National Bank in India of defrauding it of nearly $2 billion.
Or, even more significant, burdensome leases on its 120 leased stores in 23 states. Per the company:
The Debtor's headquarters and retail stores are leased. The Debtor does not own any real property. The aggregate monthly rent due under the leases (collectively, the "Leases") is approximately $1.7 million. The Debtor's retail store Leases generally have initial terms of ten years with varying options to extend. As of the Petition Date, the remaining terms under the Debtor's existing store Leases were widely variant, but the majority of the Leases currently will expire in or before 2023. The remainder of the Leases currently will expire between 2024 and 2028. As of the Petition Date, the Debtor owes approximately $3.0 million in unpaid current lease obligations.
And so, against this backdrop, the “bid” clearly failed because, today, Texas-based Samuels Jewelers Inc. has, indeed, filed for bankruptcy. The filing essentially marks a fitting new chapter for an enterprise so accustomed to bankruptcy court that it probably ought to be paying annual dues. Predecessor entities filed for bankruptcy in 1992, 1997, and 2003. With that historical perspective, we suppose that Gitanjali ought to be commended for extending the company’s streak outside of bankruptcy court beyond five or six years to a…gulp…commendable fifteen.
Why bankruptcy? Why now? To elaborate on our preface, a few reasons. First,“increasing competition in the retail jewelry industry, including competition by discount and other retailers, including online retailers.” So, like we said. And, second, the aforementioned fraud allegations and related India National Company Law Tribunal injunctive order against Gitanjali and other former principals of the company had the affect of (a) cutting off a major source of product historically sourced from Gitanjali or other non-debtor affiliates, (b) eliminating an oft-tapped short-term funding source, and (c) spooking third-party vendors and suppliers. Given these issues, the company opted to seek chapter 11 protection with the hope that it could stabilize operations, enhance liquidity and preserve value. In that vein, the company — despite having neither an investment banker nor a stalking horse bidder at the time of filing — hopes to sell the business as a going concern. Contemporaneously, the company hopes to assume an agreement to retain Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC as consultants to dispose of excess inventory and conduct store closing sales. Accordingly, major creditors include, as you might expect, the usual array of landlords, General Growth Properties ($GGP), Simon Property Group Inc. ($SPG), and Macerich Co. ($MAC).
Finally, the company will also seek approval of a poorly-named $100mm DIP Working Capital Facility — the majority of which will be used not for working capital but to roll-up Wells Fargo and Gordon Brothers’ loans — to fund the case until a buyer is found or the company liquidates. Anyone want to place bets on which scenario plays out?
Jurisdiction: D. of Delaware (Judge Carey)
Capital Structure: $84mm revolving credit facility (Wells Fargo Bank NA), $10mm term loan (GB Credit Partners LLC)
Legal: Jones Day (Greg Gordon, Amanda Rush, Jonathan Fisher, Paul Green) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, Zachary Shapiro)
Financial Advisor: Berkeley Research Group (Robert Duffy)
Liquidators: Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC
Claims Agent: Prime Clerk LLC
Other Parties in Interest:
Prepetition RCF Lender: Wells Fargo Bank NA (Legal: Morgan Lewis & Bockius LLP, Julia Frost-Davies, Christopher Carter, Sandra Vrejan & (local) Reed Smith LLP, Kurt Gwynne, Jason Angelo).
Prepetition Term Agent & DIP Term Agent: Gordon Brothers Finance Company (Choate Hall & Stewart LLP, John Ventola, Jonathan Marshall & (local) Womble Bond Dickinson US LLP, Matthew Ward, Morgan Patterson)