March 9, 2020 – The Debtors filed a motion seeking Court approval of (i) store closing sale procedures and (ii) a consulting and marketing services agreement, dated as of March 5, 2020 (the “Consultant Agreement”), entered into amongst the debtors and a contractual joint venture between Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC (together, the “Consultant”) [Docket No. 52].
The Consultant Agreement is interesting. Further to a series of agreements entered into amongst the Debtors, the Consultant and prepetition term loan lenders ("KKR"), including an agreement whereby the Consultant has purchased KKR's interest in prepetition term loans issued by KKR to the Debtors, the Consultant's compensation is to be entirely derived from any recovery received in respect of those prepetition term loans.
The motion states, “The Debtors have commenced these chapter 11 cases to effectuate a going-concern sale of approximately 44 stores and two distribution centers operating under the Wolf and Levin banners and to wind down their remaining store locations and other operations through a going-out-of-business sales process.
In connection with the aforementioned wind-down process, prior to the Petition Date the Debtors conducted a competitive process to engage an exclusive consultant(s) to provide a wide range of asset disposition consulting and related services to assist in and facilitate the Debtors’ planned wind-down efforts. During the course of that same proposal solicitation process, Hilco and Gordon Brothers were engaged in parallel discussions with the Debtors’ prepetition term loan lenders, FS KKR Capital Corp. and FS KKR Capital Corp. II (collectively, ‘KKR’) concerning the status of the prepetition term loan debt (the ‘Term Loans’), and the prospects for development of a creative consulting structure such that the Debtors’ estates and their various stakeholders could be spared the burden of having to pay the types of consulting fees that are customary for the types of asset disposition services required by the Debtors.
After arm’s-length and extensive negotiations, these discussions ultimately yielded a series of agreements under which (a) the Debtors determined to engage the Consultant to provide the full range of asset disposition consulting services required by the Debtors in respect of merchandise inventories, fixed assets, receivables (subject to a Debtors’ option), and intellectual property, (b) HGB AVF Lending, LLC (‘HGB’), an entity controlled by affiliates of Hilco and Gordon Brothers, entered into an agreement with KKR under which HGB acquired KKR’s interests in the Term Loans (and as part of such transaction GBH agreed to share a portion of any recovery, if any, it may later receive on account of the Term Loans), and (c) the Consultant simultaneously agreed with the Debtors that the Consultant would NOT earn or be paid any consulting or other fee or compensation from the Debtors or their estates, other than reimbursement of certain out-of-pocket expenses incurred in connection with the conduct of the Store Closing Sales, any such reimbursement being strictly in accordance with a budget agreed to by the Debtors and the Debtors’ secured lenders.
Through this approach – whereby the Consultant’s only opportunity to realize any compensation on account of the consulting services being provided under the Consulting Agreement is through a recovery realized by its affiliates on account of the Term Loans (a portion of which recovery, if any, will be shared with KKR) – the Debtors, in consultation with their professionals and key stakeholders, determined that the above-described arrangement provided the best framework for accomplishing the Debtors’ paramount goal of an orderly and efficient liquidation of all assets. At the same time, this arrangement fully aligned the estates’ interests with those of the Term Lender in achieving maximum realizable value for Debtors’ assets during the wind-down process.
Based on an evaluation of the circumstances, the economic structure of the Consulting Agreement, and the Consultant’s experience in conducting Store Closings on similar timelines, the Debtors’ management, in consultation with the Debtors’ advisors, determined that the Consultant provided the best and most competitive proposal.”
Store Closings
The assets not included in the Levin-Wolf Sale will be subject to going-out-of-business sales conducted by a contractual joint venture (the “Consultant Agreement”) between Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC (together, the “Consultant”) To maximize recoveries and minimize administrative expenses, the Debtors announced and initiated a soft launch of the store closing sales on March 5, 2020 and will seek to expedite the remaining store closure sales in order to complete them within six to eight weeks.
Levin-Wolf Sale
The Debtors have reached an agreement with Robert Levin, the former owner of Levin Furniture, regarding a going-concern sale of certain of the assets of Sam Levin, Inc. and LF Trucking, Inc. (the “Levin-Wolf Sale”). The key terms of the Levin-Wolf Sale are set forth in a letter of intent, dated as of March 4, 2020, which is attached to the Ladd Declaration at Exhibit B. The Levin-Wolf Sale is to occur via a section 363 private sale with the purchase price to be calculated based on 82.25% of the cost of inventory to the Debtors as adjusted, inter alia, by an additional $3.65mn for FFE and the exclusion of the inventory at eight Virginia and Maryland stores (estimated value $4.5mn)
Prepetition Debt
As of the Petition Date, the Debtors’ had outstanding funded-debt obligations of approximately $208.5mn.
|
Funded Debt |
Maturity |
Principal Outstanding as of the Petition Date |
|
Prepetition ABL Credit Facility |
March 1, 2022 |
$33.5mn |
|
Prepetition Term Loan |
March 1, 2024 |
$175mn |
|
Total Funded Debt |
$208.5mn |
|
About the Debtors
Art Van is a brick-and-mortar furniture and mattress retailer headquartered in Warren, Michigan. The Company operates 169 locations, including 92 furniture and mattress showrooms and 77 freestanding mattress and specialty locations. The Company does business under brand names, including Art Van Furniture, Pure Sleep, Scott Shuptrine Interiors, Levin Furniture, Levin Mattress, and Wolf Furniture. The Company was founded in 1959 and was owned by its founder, Art Van Elslander, until it was sold to funds affiliated with Thomas H. Lee Partners, L.P. (“THL”) in March 2017. As part of this transaction, THL acquired the operating assets of the Company and certain real estate investment trusts, who closed the transaction alongside THL, acquired the owned real estate portfolio of the Company, and entered into long-term leases with Art Van. The proceeds from the sale-leaseback transaction were used to fund the purchase price paid to the selling shareholders. Pennsylvania-based Levin Furniture and Wolf Furniture were acquired by Art Van in November 2017 through similar transaction structures. As of the Petition Date, the Company operates stores throughout Michigan, Indiana, Ohio, Illinois, Pennsylvania, Maryland, Missouri, and Virginia.
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