Insolvency could be looming for teen retailer Wet Seal, its committee of unsecured creditors said.
The group filed an objection in bankruptcy court pushing back on the company’s use of its cash collateral, which the committee said gives unfair priority to paying off its senior debtholders. The committee called Wet Seal’s bankruptcy — the second following its first in 2015 — “a clear-cut case of administrative insolvency” with “at best, an extremely narrow equity cushion.”
The secured noteholders want to be fully repaid for the term loan, revolver, interest and other payments by March 4. If that is granted, the committee argued in court documents, there would be nothing left for unsecured parties or administrative costs that haven’t been factored into the company’s budget.
The committee outlined those fees and said they total about $6.08 million and include sales tax, professional expenses, a transaction fee for the sale of intellectual property and stub rent owed to landlords, among other costs. The last of those, the stub rent, is the source of a separate objection filed in court involving several landlords, including GGP LP and Simon Property Group Inc., that is requesting payment of rent for the retailer’s use of their properties to conduct Wet Seal’s store closing sales.
The company struggled upon emergence from its first bankruptcy, when it was acquired out of auction by Versa Capital Management LLC. The business never recorded a profit following that sale, according to court filings and was out of time and money by mid-2016. Attempts to source additional capital to stave off another bankruptcy proved unsuccessful.
The company’s liquidation began Jan. 23, about a week before it filed for Chapter 11.
Proceeds from those sales haven’t been hitting targets. The company has so far brought in $12.09 million from its going-out-of-business sales for the period beginning Jan. 23 through Feb. 18, according to court documents. That’s off 12.5 percent from what was originally budgeted and down 4.2 percent from a forecast based on strong online sales for the remaining two-and-a-half weeks of the liquidation, according to a declaration in support of the unsecured creditors committee’s objection by Stilian Morrison, managing director of professional services firm Province Inc.