June 16, 2020 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors’ proposed $435.0mn debtor-in-possession (“DIP”) financing, arguing that it unduly protects the Debtors' senior lenders (who have been "cede[d] control of these cases") and improperly impinges on the Committee's fiduciary duty "to maximize recoveries for its constituents" [Docket No. 200].
Citing aggressive Chapter 11 milestones, a too short challenge period and a "woefully inadequate" budget for their professionals (including as to any investigation of the Debtors' history/relationship with its senior lenders, principally Blackstone), the Debtors urge the Court to make modifications that would allow it "to turn over every stone." The stone that the Committee really wants to turn over (and over) is Blackstone, with the Committee implying that Blackstone, in its multiple pre- and post-petition roles (the Debtors' Plan has Blackstone swapping its $700.0mn of second lien debt for 100% of the emerged Debtors' equity) is being allowed unfettered access to the henhouse.
The Committee’s objection states, “The proposed financing, as currently structured, limits the Committee’s ability to fulfill its statutory and fiduciary mandate to conduct a thorough and impartial investigation if and when one becomes necessary. By providing a meaningless Challenge Budget and a Challenge Period that is too short to be effective, the Final Order will preclude the Committee from performing its fiduciary duties to creditors. The DIP Facilities for which the Debtors seek final approval are being provided by the same institutions that (i) stand to receive substantially all of the equity of the reorganized Debtors upon consummation of the proposed restructuring embodied in the Restructuring Support Agreement, and (ii) engineered an October 2018 acquisition (the ‘GBG Acquisition’) of a significant portion of Global Brands Group Holding Limited’s North American Licensing business, which comprised 74% of the Debtors’ pro forma 2018 revenues and 71% of its gross profit. The GBG Acquisition was organized and orchestrated by GSO/Blackstone, which, concurrently with the GBG Acquisition: (i) acquired a substantial ownership position in Centric; and (ii) executed the Prepetition Second Lien Term Loan Facility as Prepetition Second Lien Lenders thereunder. It is of utmost importance, then, that the Committee not be hindered in connection with its efforts to turn over every stone as it endeavors to maximize recoveries for its constituents.
Through the Restructuring Support Agreement and DIP Facilities, the Debtors effectively have agreed to cede control of these cases to their secured lenders. The Committee, however, stands ready to exercise its fiduciary duty and assure that maximum value for unsecured creditors is preserved. The Committee’s ability to do so must not be short-circuited by unnecessary and overreaching provisions of the DIP Facilities. Accordingly, the Committee submits that entry of a Final Order is not appropriate without the following modifications:
a. Milestones. The chapter 11 milestones imposed under the DIP Facilities are aggressive and do not provide for the flexibility necessary to ensure a smooth chapter 11 process. The milestones should be adjusted to allow for a successful reorganization and to provide the Committee ample time and opportunity to perform its statutory duties.
b. Challenge Period/Budget. The Challenge Period should be extended and the Challenge Budget increased so that the Committee may fulfill its fiduciary duty to maximize recovery for unsecured creditors. In addition, the Final Order should provide that the Committee automatically shall have standing to bring any derivative claims on behalf of the estates in connection with a Challenge (defined below).
c. Professional Fee Carve Out. The DIP Facilities provide for a Carve Out for the payment of Professional Fees that is woefully inadequate as to the Committee’s professionals and prefers the Debtors’ professionals. The Final Order should require that the DIP Budget be modified to provide for a budget of $1.25 million per month for Committee professionals. In the alternative, the Final Order should require that budgeted fees for estate professionals shall be shared pro rata among all professionals, such that the Debtors’ professionals are not preferred over other estate professionals
d. No Liens/Claim on Unencumbered Assets. The Final Order should clearly state that no assets of the Debtors that were unencumbered as of the Petition Date (including, without limitation, the proceeds of Avoidance Actions) shall be subject to: (i) the DIP Liens; (ii) the DIP Superpriority Claims; (iii) the Adequate Protection Liens; or (iv) the Adequate Protection Superpriority Claims.
e. The Delaware LLC Act. With respect to the nineteen debtors that are limited liability companies organized under the laws of the State of Delaware, the Final Order should include a stipulation and agreement from each of the Prepetition Secured Parties that none of them will raise as a defense in connection with any Challenge the ability of creditors to file derivative suits on behalf of limited liability companies. The Final Order also should impose an appropriate deadline on the Debtors to amend the limited liability agreement of each Delaware LLC Debtor to permit a Challenge or any adversary proceeding or contested matter against a Prepetition Secured Party to be commenced by the Committee.”
Background
In a press release announcing their Chapter 11 filings, Centric advised that it “has entered into a Restructuring Support Agreement ('RSA' or the 'agreement') with substantially all of the Company’s secured lenders, led by certain funds managed by Blackstone ('Blackstone'), Ares Management Corporation ('Ares'), and HPS Investment Partners ('HPS'), to recapitalize the Company, provide $435 million in debtor-in-possession financing and allow the Company to operate without interruption throughout the restructuring process.
Additionally, the agreement contemplates a timely emergence from the process with a plan to substantially reduce the Company’s funded second lien indebtedness by approximately $700 million, thereby positioning the business for future growth and success.
Under the terms of the RSA, Centric Brands expects to emerge from Chapter 11 as a private company. Blackstone will exchange second lien debt for equity interests in the reorganized company. Existing senior lenders Ares and HPS will retain their senior loan positions and will receive equity interests in the reorganized company."
Mr. Jason Rabin, the Debtors' CEO, commented. “The current crisis has significantly impacted companies across all sectors. The pandemic disrupted many of our wholesale accounts’ ordering and constrained our cash flow. However, we are confident that with added flexibility in our capital structure, we will be well-positioned for long-term success during this period and beyond. We thoroughly evaluated all possible strategic options to address this environment. After extensive review, we determined that partnering with our current lenders to pursue this path will result in a stronger financial position and more resources to support future growth, while allowing us to focus on serving key stakeholders.”
Principal Shareholders
- Cede & Co: 23.259%
- GSO Capital Opportunities Fund III LP (ie Blackstone): 15.441%
- GSO CST III Holdco LP (ie Blackstone): 13.711%
- BTO Legend Holdings (Cayman) NQLP (ie Blackstone): 12.284 %
About the Debtors
Centric Brands Inc. (NASDAQ: CTRC) is a leading lifestyle brand collective that designs, sources, markets and sells high quality products in multiple segments, including kids, men’s and women’s apparel, accessories, beauty, and entertainment. The Company’s portfolio includes more than 100 iconic licensed brands, including for kids apparel, Calvin Klein®, Tommy Hilfiger®, Nautica®, Spyder® and Under Armour®; for men’s and women’s apparel, Joe’s Jeans®, Buffalo®, Hudson Jeans®; for accessories, Kate Spade®, Michael Kors®, All Saints®, Frye®, Timberland® and Jessica Simpson®; and for entertainment, Disney®, Marvel®, Nickelodeon® and Warner Brothers®, among others. Owned brands include Hudson®, Robert Graham®, Swims®, Zac Posen® and Avirex®. The Company’s products are sold primarily in North America through leading mass market retailers, specialty, and department stores, and online. Centric Brands has unparalleled expertise in product design, development and sourcing, retail and digital commerce, marketing, and brand building. The Company is headquartered in New York City and has offices in White Plains, Los Angeles, Greensboro, N.C., Toronto, and Montreal.
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The post Centric Brands Inc. – Creditors Committee Objects to DIP Financing that “Cedes Control” to Blackstone, Including by Making Exercise of the Committee’s Fiduciary Duties Impossible appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.