Forever 21 is dealing with sharp liquidity constraints in the early days of its bankruptcy proceedings and needs quick access to cash, as some $40 million in rent obligations and some $18 million in payroll expenses come due.
The fast-fashion retailer urged a Delaware bankruptcy court on Tuesday to let it immediately access some $60 million of its proposed debtor-in-possession financing package, which its attorney argued would help the company stay afloat amid its significant ongoing expenses.
The company entered into Chapter 11 on Sunday with a DIP financing proposal that includes a $275 million asset-based loan facility, with J.P. Morgan Chase acting as administrative agent, and a $75 million term loan from TPG Sixth Street Partners. Forever 21 argued on Tuesday that it needs immediate access to $60 million of that term loan, which would go toward paying its secured debt from before the bankruptcy, and free up its borrowing base to obtain more money going forward.
Forever 21’s attorney Aparna Yenamandra, a partner at Kirkland & Ellis LLP, underscored the urgency of receiving the proposed DIP financing, and pointed to the retailer’s projections that it will experience more than $15 million in negative cash flow over the first two weeks of the bankruptcy. Its rent and payroll obligations are due during the same time frame, Yenamandra told the court.
“The first four weeks are mission critical to our ability to successfully reorganize,” Yenamandra told the court. “The debtors looked high and low for financing — over 30 parties signed [non-disclosure agreements].”
“This was a hard-fought, competitive result,” she said.
Judge Mary Walrath, who presided over Tuesday’s hearing, indicated she would approve the financing as soon as the parties submitted some final revisions. The case was assigned to Judge Kevin Gross.
The retailer entered into the bankruptcy with some $228 million in long-term debt obligations, including $194.5 million in a pre-petition ABL loan facility. Its proposed DIP financing would also involve a number of fees, including one for $5.3 million, as well as $750,000 in commitment fees, and an additional $3 million in exit fees to be paid at the end of the case, Yenamandra said at the hearing.
The company expects its liquidity to dip further in the coming week, sinking to $29.6 million, the lowest in its projections for over a roughly three-month period ending in late December. That’s a bare-minimum cushion for a $3 billion business, Yenamandra told the court.
One of the culprits behind the bankruptcy was seen as the retailer’s expansion of physical stores, facilitated in part by the post-2008 recession years that offered up affordable retail real estate. In court filings Monday, the company indicated plans to close hundreds of stores, including up to 178 in the U.S. The retailer will formally address the store closings in a hearing scheduled for Oct. 28.
The store closings would take place in November and December, Forever 21’s chief restructuring officer Jonathan Goulding, managing director at Alvarez and Marsal North America who has been advising the retailer since June, told the court.
On Tuesday, Forever 21 also obtained a series of customary interim approvals from the court — to pay wages, utility bills and maintain insurance programs — and keep the business operating.