The men’s wear company, which owns clothing brands including Men’s Wearhouse and Jos. A Bank, received $75 million in additional financing last month from existing lender Silver Point Capital LP, in a decision-making process that a group of beneficiaries to the liquidating trust have since questioned for its independence. The objecting group has argued that the decision behind the financing was directed by members of the new board of the newly restructured company, two of whom were designated by Silver Point.
At a hearing before a Texas bankruptcy court on Thursday, the group of objecting beneficiaries sparred with the trustee of the liquidating trust about the decisions and process that led to the financing. But the hearing also highlighted the difficulties for retail during the ongoing COVID-19 pandemic that has throttled mall and store traffic.
The trustee, Mohsin Meghji of corporate and restructuring advisory firm M3 Partners, which was financial adviser to the unsecured creditors committee in the case, testified at Thursday’s hearing that Tailored Brands’ receipts in November and December were $181 million, roughly $84 million below the company’s forecast. He added also that for the company’s net cash flow during that period, the bottomline was $72 million below the budgeted cash flow. Addressing these difficulties quickly was key to preventing another possible bankruptcy filing, Meghji told the court.
“If the liquidity issues could not be resolved, and trade creditors stopped supplying, and there were cross defaults triggered….there was a real risk of another [bankruptcy] filing, particularly given how quickly the company was experiencing these issues,” he said.
On Thursday, Meghji testified that he himself had not learned of the company’s difficulties for months. He said he had been shut out of the discussions by the restructured company’s new board as early as in December about the retailer’s financial difficulties soon after emerging from bankruptcy. The company’s restructuring plan had gone into effect on Dec. 1, according to court filings.
Meghji said that it wasn’t until some time in mid-February that he learned through lender contact that “the scuttlebutt” in the lending market was that Tailored Brands was having financial difficulties.
Meghji, in his role as trustee of the liquidating trust, was supposed to be an observer at board meetings at Tailored Brands and kept informed of such developments, but testified Thursday that he had not “had a single communication from the company” about those issues at that point.
However, after the company’s advisers assured him that his exclusion from those discussions was an erroneous oversight and gave him the details, Meghji said that his analysis of the company’s data led him to conclude the best option was to support the additional financing and agree to a proposed settlement between the trust and the reorganized Tailored Brands and related parties.
“I was stuck between a rock and several hard places,” Meghji told the court Thursday. “There was no great answer, and that was not driven by anything I did. But I wanted to make sure that once I became aware of this, I did everything in my power, both from a diligence standpoint, from aggressively negotiating with Silver Point and the company, to get the best answer under the circumstances.”
On Thursday, U.S. Bankruptcy Judge Marvin Isgur approved the settlement related to the financing, which allows the sale of the 562,500 shares of equity shares in the reorganized Tailored Brands that are currently in the liquidating trust for the benefit of certain unsecured creditors in the case. Under the deal, the shares would be sold to Silver Point at a price tag of $550,000. The agreement would also allow the trust to release claims against the reorganized company, directors, Silver Point and others for a $2.75 million payment.
The objecting group had argued that accepting $550,000 to sell stock that was once calculated to be worth more than $9 million would severely shortchange a large group of creditors. But Isgur ruled that the settlement was appropriate in light of the circumstances under which Meghji had acted to support the company’s ability to stay afloat.
“It very quickly developed that the Tailored Brands Christmas season was nowhere near what it was forecast to be,” Isgur said Thursday evening. “Tailored Brands, according to the undisputed evidence, was running out of money, and was approaching very rapidly a point at which you have negative current assets and negative cash and be unable to pay its bills.”
“Mr. Meghji…had to confront the liquidating trust that was thrown into a world of imperfect forecasting, where, it turned out, things were very bad,” he added. “The company was going to fail if it didn’t get new financing. Those directors couldn’t, and didn’t, change the COVID-19 world that decimated sales numbers and decimated the company’s cash flow.”