👗New Chapter 11 Bankruptcy Filing - The Collected Group LLC👗

The bankruptcy gods love spitting in our faces. Every single time — seriously, EVERY … SINGLE … TIME — we comment about a certain sector being slow, the gods respond with a fresh chapter 11 bankruptcy filing in that sector. In Sunday’s recap of Q121, we noted how retail has, along with virtually every other sector, been quieter than most would have expected given the pandemic. And then — 💥BOOM💥— a CA-based KKR-backed company called The Collected Group LLC (along with four affiliates, the “debtors”) filed a prepackaged chapter 11 bankruptcy in the District of Delaware on Monday, April 5. The debtors are the companies behind apparel lifestyle brands Joie (55% of ‘20 net sales), Equipment (35% of ‘20 net sales) and Current/Elliott (11% of ‘20 net sales) that the debtors take pains to note were worn by influencers like Jennifer AnistonSarah Jessica ParkerEva LongoriaCameron DiazDrew BarrymoreKate Middleton, and Meghan Markle.

This filing represents a complete capitulation of the debtors’ pre-pandemic brick-and-mortar-based business model. As of March 2020, the debtors operated approximately 30 brick-and-mortar stores in high-end mall locations across various states. We’re talking “A Malls,” folks: places like Simon Property Group’s ($SPG) Fashion Valley Mall LLC or Brookfield Asset Management’s ($BAM) Tysons Galleria LLC or Westfield’s Century City Mall LLC. Well, buh-bye. The debtors intend to reject all of their leases and intend to focus all of their efforts going forward on e-commerce and wholesale (where they sell and distribute merchandise to the likes of Bloomingdale’sNeiman MarcusNet-A-PorterNordstrom, etc.). The debtors even abandoned their headquarters in both New York and Los Angeles.

The debtors’ performance speaks to why it’s pretty much a no-brainer to abandon their brick-and-mortar strategy. Sales trends were:

  • E-commerce: 16% of net sales in ‘19, ~50% of net sales in ‘20.

  • Wholesale: 67% of net sales in ‘19, ~45% of net sales in ‘20.

We’re not math experts but, after totaling those numbers, it doesn’t look like there was a tremendous amount of ROI on those expensive A-mall leases even before the pandemic. Good marketing, though. Maybe. 🤷‍♀️

The trajectory of the debtors’ e-commerce business is telling:

If only the the debtors’ capital structure was that pretty; rather, it is a convoluted mess but the proposed prepackaged plan of reorganization simplifies things a bit. It looks like this (in order of priority):

  • $39.5mm in 10.75%+ “Backstop Obligations” + ~$4.6mm in “Bridge Term Loans” + ~$5.4mm “Eight Amendment Term Loans” + $3mm “Twelfth Amendment Term Loans” + $2mm “Thirteenth Amendment Term Loans” (first priority);

  • ~$84.9 Initial Term A Loans + ~$19.3 Delayed Draw Term Loans (second priority); and

  • ~$26.4mm Initial Term B Subordinated Loans (third priority).

While that debt-load is obviously problematic when a pandemic comes and crushes a business, it appears that the debtors’ pre-petition lenders (cough, KKR) — who also became owners after a 2018 out-of-court restructuring — exhibited a generous amount of latitude (in case the “Thirteenth Amendment Term Loans” didn’t provide any indication). Indeed, they provided a letter of credit backstopping a $39.5mm unsecured Wells Fargo-provided facility, the proceeds of which refinanced a prior ABL facility; they also provided a number of liquidity infusions over the last year-plus that helped balloon the overall outstanding funded debt amount but also helped “bridge” the debtors to the prepackaged plan.

Of course, in order to get any court blessing on a plan of reorganization that has KKR’s fingerprints all over it, the debtors first needed to hand over decision-making authority to a pair of independent directors. These directors, along with the debtors’ retained professionals, undertook a strategy of targeting the debtors’ landlords and material vendors for material concessions so as to implement an out-of-court restructuring. They, unfortunately, didn’t get the buy-in they would have liked.

The directors also pursued an examination of KKR’s involvement to ascertain whether there were any potential causes of action against the PE shop. They concluded there aren’t.

Speaking of conclusions, while all of this was transpiring, the debtors’ bankers were out in the market soliciting interest in the debtors’ assets with the hope that those assets might draw sufficient interest and robust offers such that any purchase price might clear the secured debt. To which we merely respond: HAHAHAHAHAHAHAHA. Good luck with that.* They did, however, secure a $9.2mm new money DIP from the debtors’ pre-petition lenders.

Apropos to our uproarious laughter, the debtors’ proposed plan of reorganization shows where the value breaks. Holders of the first priority secured claims will, if the plan is approved as proposed, walk away with $14.5mm in exit paper, 100% of post-reorg preferred equity and 95% of the post-reorg common equity (subject to dilution on account of a management incentive plan). In other words, KKR will continue to control this business.

Meanwhile, the holders of second priority claims will get 5% of post-reorg common equity (subject to dilution).

Third priority claimants? They’ll get jack sh*t, just like general unsecured claimants (owed ~$35.5mm) and equity.

Once effectuated, the end result will be debtors that have de-levered by approximately $155mm (leaving ~$30mm of exit paper clipping LIBOR+7.75%). The transaction reflects an estimated $30mm-$55mm enterprise value for the go-forward company. The debtors’ project stellar growth out of both wholesale and e-commerce starting in FY22 (18% from FY22 to FY23). Still, even with that growth, the debtors estimate that by FY25, they still will not have recovered to FY19 net revenue levels. 😬

See that line-item designated “Channel Operating Expenses.” That is, among other things, digital marketing cost. Somehow Facebook Inc. ($FB) and Alphabet Inc. ($GOOGL) always seem to win: the brick-and-mortar landlords’ revenue loss is the digital landlords’ gain.

The debtors hope to be in and out of bankruptcy court in 45 days.

*The bankers will continue to market the assets in parallel with pursuit of the prepackaged plan in the hope that some miracle buyer emerges.

Date: April 5, 2021

Jurisdiction: D. of DE (Judge Silverstein)

Capital Structure: See above.

Company Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, John Weber, Brian Bolin) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Andrew Magaziner, Joseph Mulvihill, Malak Doss)

  • Board of Directors: Lauren Krueger, Kevin O’Neill, Silvia Mazzuchelli, John Brecker, Bradley Dietz

  • Financial Advisor/CRO: Berkeley Research Group (Evan Hengel, Marissa Light, Matt Grumoli)

  • Investment Banker: Miller Buckfire (James Doak)

  • Claims Agent: Epiq (Click here for free docket access)

Other Parties in Interest:

  • KKR Credit Advisors US LLC

    • Legal: Proskauer Rose LLP (Vincent Indelicato, Megan Volin) & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Andrew Remming)