Forever 21 persuaded a Delaware bankruptcy court that it has only one way forward.
At a hearing Tuesday afternoon, attorneys and advisers for the bankrupt fast-fashion retailer made the case that its $81.1 million deal with licensing company Authentic Brands Group and landlords Simon Property Group and Brookfield is its only hope for survival, even though it would leave more than $120 million in unpaid post-bankruptcy claims to handle.
U.S. bankruptcy Judge Kevin Gross agreed and indicated he would formally approve the sale once the parties finalized some of the smaller details that were still being worked through.
“Clearly, this is the only bid, and the alternative is liquidation, which is certainly not in anyone’s interest,” said Judge Gross.
Attorneys for vendor and exporter groups, who had filed objections in the case, continued to raise concerns about how vendors would be paid after the sale closes and the proceeds go first to the retailer’s secured lenders.
The company racked up significant debts during bankruptcy. It estimates it owes some $120 million in unpaid claims to vendors who provided goods during the bankruptcy, as well as roughly $10 million to $15 million in similar administrative claims to non-merchandise vendors, Forever 21’s chief restructuring officer Jonathan Goulding, a managing director at Alvarez and Marsal North America, told the court. Administrative claims refer to payments a company owes to creditors for services they provided during its bankruptcy.
But Forever 21’s advisers also pointed out the deal’s other benefits to vendors: In addition to putting up the $81.1 million purchase price, the buyer group will also provide some $20 million in payments for goods Forever 21 has accepted in the past two weeks, as well as up to an additional $53 million for other goods it is bringing in. The buyers will also assume what the creditors’ committee has estimated will be “hundreds of millions of dollars” worth of purchase orders for goods that are in transit or which haven’t left vendors’ warehouses.
“Some administrative claims will be paid by the buyer as assumed liability, and there will be other administrative claims that will be left behind,” Goulding said.
One major point of contention in the sale process has been its short timeline. Forever 21 disclosed its stalking horse bid from the group on Feb. 2, a deal that set a deadline of less than a week from that point for competing bids. Though the company had signs of interest from a handful of potential bidders, and worked through the weekend to find an alternative, it ultimately didn’t come to court with any other bids.
Kenneth Rosen of Lowenstein Sandler, an attorney for one aspiring bidder he declined to identify but described as a “strategic” client, told WWD that they worked “feverishly” over the past week or so to put together a deal in the neighborhood of $300 million. Rosen said his client had committed equity of roughly $50 million and needed to obtain either additional equity or additional debt that wouldn’t have hurt the balance sheet, but ran out of time.
Rosen did not appear at the sale hearing Tuesday, but described his client as a women’s apparel chain with hundreds of locations, and looking to expand in the U.S. The strategic player has a similar customer base as Forever 21 and relies on many of the same vendors, he said.
“To put together a $300 million transaction in eight days is an impossibility,” said Rosen.
A bid that size might have been necessary to beat out the $81.1 million stalking-horse bid by the ABG, Simon and Brookfield consortium, because of the liabilities the stalking-horse bid also envisioned taking on, which includes up to $73 million in payments to some vendors for certain merchandise, and the retailer’s rent for February.
However, those payments will not make a dent in the $120 million outstanding claims to vendors.
Earlier in the proceedings, Forever 21’s vendor support agreements had indicated that vendors supplying goods during the bankruptcy would be paid, but that changed as Forever 21’s finances grew more dire. A reappraisal of its inventory that took place last fall led to the discovery that its inventory was worth less than anticipated, which hurt the retailer’s ability to use the debtor-in-possession facility helping fund its operations.
As a result, the retailer had to stop taking in new merchandise around mid-January, its advisers told the court this month, and vendor agreements have been modified. As it stands, the company expects to close the week with roughly $5 million in cash.
Jeffrey Waxman of Morris James, who represents a group of vendors that raised concerns about the deal, highlighted the deal’s mixed rewards.
“This is a lot less painful as a result of the sale process that has culminated today,“ Waxman told the court.
“Jobs will be saved, there will be tenants in malls all over the country selling Forever 21 goods, including goods by my client,” he said. “That still doesn’t remedy the fact that there are $120 million of vendors’ claims and $10 [million] to [$15 million] of non-vendors’ claims that are still short.”