Barneys New York has fervently touted its $217 million in debtor-in-possession financing arrangement as its ticket out of bankruptcy, but top creditors including Prada USA Corp. and Chloé aren’t convinced the terms won’t simply push the retailer into liquidation.
On Friday, the official unsecured creditors’ committee sounded alarm bells over what it characterized as “predatory” terms of the financing by Brigade Capital Management LP and B. Riley Financial Inc. They took aim at the various fees and interest payments involved in the arrangement, especially an “enhancement fee” of 37.5 percent of any sale proceeds that would be left over after paying off the DIP loans and other costs.
The committee argued also that much of the financing would mostly go toward paying off Barneys’ secured pre-petition debt, and leave the retailer with only about $15 million. Such a modest sum for operating expenses, and the “egregious” amount in fees going to the lenders under the financing plan would only sap Barneys’ estate and deprive its creditors, the committee argued.
“Unfortunately, the rescue financing that the debtors have proposed mostly consists of ‘smoke and mirrors’ with insufficient fresh capital to conduct a fulsome sale process or even to replenish inventory in the ordinary course, and excessive fees that will quickly swallow any benefit of such financing to these estates,” the committee said in the filing.
“In the end, the most likely outcome here under the proposed rescue financing is a forced liquidation of the debtors and their valuable intellectual property — something that the committee (and hopefully the debtors) want to avoid,” it said.
Representatives for Barneys did not immediately comment on Friday.
The unsecured creditors’ committee, which the U.S. Trustee appointed on Aug. 15, comprises seven members including factoring firm Hilldun Corp. and some landlords and vendors.
According to its Chapter 11 filing, Barneys owes Prada more than $1.6 million and Chloé nearly $1 million.
Barneys, which is closing 15 stores as part of the bankruptcy, has argued that the financing deal would help it keep the lights on at its remaining stores, while helping it secure a buyer by late October. Barneys has previously said the deal gives it until Oct. 24 to find a buyer, but in the filing Friday, the creditors’ committee put the date at Oct. 22. If Barneys can’t find a buyer by then, it faces the prospect of immediately liquidating, the committee said.
The committee is skeptical of Barneys’ use of the financing, much of which would go toward paying off the retailer’s $192 million in secured pre-petition debt under a revolving credit and term loan facility.
The committee argued on Friday that it needs more time and resources — at least $200,000, and not the $25,000 budgeted for its investigation — to inquire into the pre-petition lenders’ claims being paid off, according to the committee’s filing.
Judge Cecelia G. Morris, who is overseeing the proceedings, has previously granted interim approval to the DIP financing, but a final hearing on the deal is scheduled for Sept. 4, according to court documents.
Barneys filed for Chapter 11 protection on Aug. 6 in New York bankruptcy court amid news about its soaring rents and efforts at the time to find a buyer.
“Here, the debtors are the victims of an overpriced and predatory DIP facility that would require the estates to incur millions of dollars of fees and interest charges, while pledging away their unencumbered assets and literally ‘gifting’ 37.5 percent of any remaining estate assets that otherwise would be available to general unsecured creditors,” the creditors said in their filing Friday.
“All this in consideration for a mere $14.9 million in actual new money advances (net of fees) to fund a going concern sale process for the debtors’ remaining seven stores over a period of three months,” it said.
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