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Fairway Group Holdings Corp. – In Ominous Harbinger for Big City Supermarkets, New York “Fooding Institution” Files Chapter 11, Begins Sales Process with $70mn Sale of 5 Stores and Distribution Center

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January 22, 2020 − In order to further a "strategic sale process," Fairway Group Holdings Corp. and 25 affiliated Debtors (“Fairway” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 20-10161. The Debtors, a leading food retailing destination in the Greater New York City metropolitan area, are represented by Sunny Singh of Weil, Gotshal & Manges LLP. Further board-authorized engagements include (i) PJ Solomon as investment banker, (ii) Mackinac Partners as financial advisors and (iii) Omni Agent Solutions as claims agent.

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. The Debtors also disclose that "as of November 2019, Fairway’s unaudited consolidated financial statements reflect…assets totaling approximately $158.9 million and liabilities totaling approximately $288.7 million."  

Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) United Natural Foods, Inc.  d/b/a Cornuco ($1.8mn trade claim), (ii) Douglaston Shopping Center Owner LLC ($961k rent claim and (iii) West Side Foods, Inc. ($957k) trade claim. In addition to numerous trade and rent claims listed amongst the Debtors' top 40 unsecured creditors are two claims in respect of pension funds, with each of UFCW Local 1500 Welfare Fund and UFCW Local 1500 Pension Plan owed in excess of $700k. As discussed below, these latter claims (reflecting only a single month of arrears to the union-related funds) are central to the Debtors' Chapter 11 filings. The accumulated liability of these funds is nearing $70.0mn and potential buyers have made it clear that they won't buy the Debtors' assets subject to pension liability or existing collective bargaining agreements ("CBA's"). These costs, the Debtors argue, are incurred against a competitive backdrop where few of their competitors are likewise largely unionized and in the larger context of traditional supermarkets facing an onslaught of new competition, especially in dense population centers where consumers have easy access to a plethora of shopping choices.

In a press release announcing the filing, the Debtors advised that: "[T]he Company has entered into a stalking horse asset purchase agreement with Village Super Market, Inc. (NASDAQ: VLGEA) to sell up to 5 New York City Fairway stores and its Distribution Center for approximately $70 million. In addition, the Company will execute a Court supervised sale process to continue to negotiate for the sale of its remaining store locations. An Ad Hoc Group of the Company's senior lenders are supportive of the sale process and have agreed to provide the Company with up to $25 million in debtor in possession financing."

Recent Financial Results

In the 52 weeks ending December 1, 2019, the Debtors reported approximately $643.3mn in sales and gross profit of $227.0mn. The Debtors reported aggregate adjusted EBITDA of $23.0mn over this same period, but the Debtors lost approximately $68.8mn during the same period as a result of depreciation, amortization, interest expense, other operating costs associated with supporting their fourteen (14) stores with a declining sales base, and additional costs to close operations at the Nanuet location.

Pre-Petition Equity

As at filing, the Debtors’ principal shareholders were as follows [NB: Each of the below equity positions reflects equity received in exchange for debt in the Debtors' 2016 bankruptcy cases]:

  • Brigade Capital Management, LP: 33.6% 
  • Goldman Sachs & Co:  29.9% 
  • FS KKR Capital Corp: 22.2%

Pre-Petition Debt

As of the Commencement Date, the Debtors’ have outstanding funded debt obligations of approximately $227.2mn under an August 2018 prepetition credit agreement (as amended several times, the “PrePetition Credit Agreement”) which consists of:

  1. approximately $16.0mn outstanding under the Super Senior Secured Term Loan Facility; 
  2. approximately $26.8mn outstanding under the Super Senior Secured L/C Facility, 
  3. approximately $76.5.0mn outstanding under the Senior First Out Term Loan; 
  4. approximately $56.8.0mn outstanding under the Senior Last Out Term Loan, and 
  5. approximately $51.0mn outstanding under the Holdco Loan. 

Super Senior Secured Term Loan Facility. Debtors Fairway Group Holdings Corp. (“Holdings”) and Fairway Acquisition are parties to an August 2018 Super Senior Credit Agreement with Ankura Trust Company, LLC, as administrative agent and collateral agent, further to which pre-petition lenders provided Fairway Acquisition with a $14.5mn delayed draw first out term loan. As at the Petition date, $16.0mn was outstanding under this facility.  The Super Senior Secured Term Loan Facility is pari passu in priority with the Super Senior Secured L/C Facility (see below), and represents (together with the Super Senior Secured L/C Facility) the Debtors’ senior-most tranche of prepetition funded debt. The Super Senior Secured Term Loan Facility matures on August 28, 2023.

Super Senior Secured L/C Facility. Debtor Fairway Acquisition is party to a $22.66mn Super Senior Secured L/C Facility for the purpose of cash collateralizing letters of credit issued by third-party issuers (i.e., entities that are not lenders under the Prepetition Credit Agreement) for the benefit of certain landlords, vendors, and other creditors of the Company.  As at the Petition date, $26.8mn was outstanding under this facility which matures on August 28, 2023. As noted above, the Super Senior Secured L/C Facility is pari passu in priority with the Super Senior Secured Term Loan Facility and represents (together with the Super Senior Secured Term Loan Facility) the Debtors’ senior-most tranche of prepetition funded debt.

Senior First Out Term Loan.  Debtor Fairway Acquisition is also party to a $65.14mn Senior First Out Term Loan.  As at the Petition date, $76.5mn was outstanding under this facility which matures on November 28, 2023.  The Senior First Out Term Loan is junior in priority to the Super Senior Secured Term Loan Facility and the Super Senior L/C Facility, but senior in priority to the Senior Last Out Term Loan (see below).

Senior Last Out Term Loan.  Debtor Fairway Acquisition is also party to a $49.7mn Senior Last Out Term Loan.  As at the Petition date, $56.8mn was outstanding under this facility which matures on November 28, 2023.  

Holdco Loan. Debtor Holdings is also the borrower in respect of $44.0mn of secured term loans (the “Holdco Loan,” and together with the Super Senior Secured Term Loans, Super Senior Secured L/C Loans, Senior First Out Term Loans, and the Senior Last Out Term Loans, the “Prepetition Secured Loans”).  As at the Petition date, $51.0mn was outstanding under the Holdco Loan which matures on February 24, 2024. The Holdco Loan is junior in priority to the Super Senior Secured Term Loan Facility, the Super Senior L/C Facility, the Senior First Out Term Loan, and the Senior Last Out Term Loan.

Trade Claims. As of January 10, 2020, the Debtors estimate that the aggregate amount of Trade Claims outstanding is approximately $15.3mn. 

2016 Bankruptcy Overview

In the 2016 prepackaged cases (confirmed in June 2016 by the U.S. Bankruptcy Court in the Southern District of New York, lead case number 16-11241), the Debtors’ reduced their funded debt by approximately $195.0mn when their then-existing secured creditors agreed to exchange approximately $279.0mn of debt for (i) 100% of equity of the reorganized Company (subject to dilution by up to 10% by a management incentive program), (ii) a $45.0mn last out exit term loan (the ‘Last Out Exit Term Loan’) with Fairway Acquisition as borrower and each of the other Fairway subsidiaries as guarantors, secured by all of the assets of Fairway, and (iii) a $39.0mn million unsecured subordinated term loan (the “Subordinated Term Loan”) with Holdings as borrower, but which was not guaranteed by the other Fairway subsidiary entities. 

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Declaration”), Abel Porter, the Debtors' Chief Executive Officer, detailed the events leading to Fairway’s Chapter 11 filing. The Declaration details a confluence of factors, the most important being a surge in online and alternative sources of food that has put enormous pressure on traditional, low-margin, supermarkets; but saves special attention for the Debtors' existing (and costly) pension arrangements. Pension costs, the Declaration argues, that are unsustainable given the macro competitive backdrop. Its not just our view, the Declaration points out in detailing the Debtors' marketing efforts to date: "No bidder has been willing to assume Fairway’s  liabilities—in particular, the Company’s substantial labor and pension obligations—in  connection with a purchase of Fairway’s stores." Clearly the Debtors, engaged in a sales effort, want to highlight the potentially rejectable pension obligations as a straw that breaks an otherwise potentially healthy camel's back. But with or without pension obligations, and not forgetting that the Debtors' benefited from the jettisoning of $195.0mn of debt in the 2016 cases), the Declaration's description of the competitive environment for supermarkets is downright scary, especially as to those located in densely populated areas.

The Declaration states: "Unfortunately, this is Fairway’s second chapter 11 filing in four (4) years.

Following Fairway’s emergence from chapter 11 in June 2016, Fairway continued to face headwinds in the market, which have continued to this date…

As to competitive issues the Declaration states: "The food retail industry as a whole, particularly in the Greater New York City metropolitan area, is highly competitive, and increasingly so in recent years. According to the Food Marketing Institute, the percentage of American consumers who called supermarkets their 'primary grocery store' has fallen from 67% in 2005 to 49% in 2018. Fairway  experiences competitive pressures across multiple market segments including from local, regional, national and international supermarket grocers such as Stop & Shop (owned by Royal Ahold), Whole Foods, Aldi, Trader Joe’s, King Kullen, Gristede’s, Citarella, Save-A-Lot and Lidl, convenience stores such as 7-Eleven, dollar stores such as Dollar General and Dollar Tree, retail drug chains such as CVS, Walgreens and Rite Aid, supercenters such as Walmart and Target, club stores such as Costco, BJ’s and Sam’s, and numerous independent and specialty stores. The Company also faces rapidly intensifying competition from well-capitalized online retail grocery giants such as Amazon, Walmart, and Target, as well as local online grocers such as FreshDirect and Peapod and meal-kit operators like Blue Apron and Hello Fresh. According  to Coresight Research, nearly 40% of Americans bought groceries online in 2019, up from under 30% in 2018. 

Finally, given the Company’s extensive prepared and fresh food offering, it competes directly with countless full service, casual dining, fast casual, quick service restaurants, many of which offer free delivery; specialty coffee shops such as Starbucks and other specialty food retailers, particularly in Manhattan….The density of the Greater New York City metropolitan area compounds the problem because of the geographic proximity between Fairway’s stores and those of their competitors.

The scale advantages that extremely large grocers, such as Amazon, Walmart, Target, Costco, BJ’s, Stop & Shop (Ahold), CVS, Walgreens, Aldi, Lidl, Dollar General and Dollar Tree have over regional grocers like Fairway cannot be overstated. These larger grocers all have investment grade credit ratings, which makes their cost of capital meaningfully lower and affords them extraordinary capacity to invest in lower prices, higher wages, more advertising, more effective modern technology and further growth, all of which enhance the probability a consumer will become and remain their customers. Fairway’s comparable store sales decreased approximately 5% in the fifty-two (52) weeks ended January 12, 2020 compared to the fifty-two weeks ended January 13, 2019.

Additionally, as discussed above, approximately 83% of the Company’s workforce is unionized. The workforces of some of the Company’s most significant competitors are not unionized, resulting in lower labor, pension, and benefit costs than the Company faces. 

On the Debtors' inability to make capital investments, the Declaration continues: "Capital improvements and investment in operations are imperative for food retailers to keep pace with their competition. Market participants are introducing technological advances and other initiatives to customize and improve consumer experience. Companies are also implementing cost-saving technologies and practices that allow them to further lower their prices, including in the areas of labor scheduling, ordering, receiving, payment processing, and data analytics. Additionally, some of the Company’s stores need renovations that would enhance customers’ shopping experience and generate increased revenues.

The Company’s increased leverage and liquidity constraints, however, have impeded its ability to invest in store renovations and in other capital and operational expenditures at the level and speed at which the food industry is evolving. 

On labor and pension costs, the Declaration adds: "The Debtors’ cost structure includes certain employee and labor-related costs that have historically driven down their profit margins. Pursuant to the CBAs, the Debtors are required to contribute to a multi-employer pension plan administered by a local United Food and Commercial Workers union, entitled the UFCW Local 1500 Pension Plan that also covers collectively-bargained employees of certain unaffiliated entities ('Pension Plan'). The Debtors also participate in a multiemployer health and welfare plan (the 'UFCW Local 1500 Welfare Fund') that provides benefits to employees represented by UFCW Local 1500, UFCW Local 371 and UFCW Local 1262. The expenses for the UFCW Local 1500 Welfare Fund total approximately $750,000 per month (or approximately $9 million in the aggregate in 2019), of which the Company pays approximately 92% (approximately $8.3 million per year).

As of August 14, 2019, the Debtors were provided actuarial information that estimates that the present value of unfunded benefits for the purposes of withdrawal liability is approximately $67 million. The unfunded liabilities of this Pension Plan may require increased future payments by other participating employers. As a result, the Pension Plan has adopted a rehabilitation plan to increase the plan’s funding percentage. The Debtors’ payments on account of the Pension Plans amount to $361,731 per month, which the Debtors have diligently paid over time until shortly prior to filing these Chapter 11 Cases, when liquidity became severely restricted.

The CBAs also mandate wage increases each year irrespective of sales. The company’s average hourly wage increased from $13.20 in Fiscal Year 2018 to $14.46 in Fiscal Year 2019 and to an expected $15.78 in Fiscal Year 2020, an increase of approximately 20%.

The Debtors also maintain third-party workers’ compensation insurance for all fourteen (14) of their stores (collectively, the 'Workers’  Compensation  Program'). The Debtors estimate that the pay approximately $4.5 million per year for premiums in connection with the Workers’ Compensation Program."

About the Debtors

The Debtors provide: "Fairway Market is a unique food retailer offering customers a differentiated one-stop shopping experience as 'The Place To Go Fooding.' Fairway has established itself as a leading food retail destination in the Greater New York City metropolitan area, recently expanding with the opening of The Cooking Place in June 2019, a cooking school that brings the same passion and philosophy about fooding to its customers. Fairway Market offers an extensive selection of fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings, along with a full assortment of conventional groceries."

The Declaration adds" "Fairway is a leading food retailing destination in the Greater New York City metropolitan area.  Fairway operates fourteen (14) supermarkets across the New York, New Jersey and Connecticut tri-state area, including two with freestanding wine and liquor stores (the Stamford and Pelham locations) and two with in-store wine and liquor stores (the Woodland Park and Paramus locations).  The Company’s flagship store is located at Broadway and West 74th Street, on the Upper West Side of Manhattan, featuring a cafe, Sur la Route, and state of the art cooking school.  Fairway employs over 3,000 individuals, approximately 83% of whom are represented by unions."

Corporate Structure Chart (see also Exhibit A of Docket No. 4)

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The post Fairway Group Holdings Corp. – In Ominous Harbinger for Big City Supermarkets, New York “Fooding Institution” Files Chapter 11, Begins Sales Process with $70mn Sale of 5 Stores and Distribution Center appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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