July 6, 2020 – Further to an objection filed by their prepetition senior lenders (the "Bank Group"), the Debtors have filed a revised motion which requests authority to (i) access $45.0mn of debtor-in-possession (“DIP”) financing to be provided by JMB Capital and (ii) use cash collateral [Docket No. 196].
The requested DIP financing has been reduced by $5.0mn from the $50.0mn originally requested and a number of further changes have been made to re-assure the Bank Group (or at least convince the Court) that the priming of the DIP financing does not leave the Bank Group exposed, an argument which they have lost to date and may not be settled by a 10% reduction in DIP borrowings and the pledging of additional collateral by the Beige family.
As the bank group sums up: "The Debtors have grossly overstated the value of the Prepetition Collateral…[based on the] blind hope that the coronavirus pandemic will not affect the Debtors’ Halloween sales."
The Debtors, whose day of reckoning is July 9th (the hearing date), plead with the Court that "this should not be how the story ends for Rubie’s Costume Company" and point to (i) a pre-Halloween order pipeline, (ii) JMB's willingness to let the Bank Group maintain a first lien on accounts receivable, and (iii) the pledging of life insurance policies and real property owned by the Beige family as proof that the "DIP Lender has materially changed the prior DIP Facility’s 'full priming' lien terms to partial priming."
The Bank Group's objection [Docket No. 129] to the Debtors' DIP financing as originally proposed [Docket No. 89] states: "The Debtors seek authorization from the Court to enter into a $50 million DIP Facility, secured by first priority priming liens on, among other things, the Secured Parties’ Prepetition Collateral. In order to secure a priming lien under section 364(d) of the Bankruptcy Code, the Debtors bear the burden of proving that the Secured Parties are adequately protected. The only adequate protection offered to the Secured Parties against the substantial diminution in value that would be caused by the priming DIP Liens is a purported equity cushion in the Prepetition Collateral, which the Debtors erroneously submit is in excess of 120% of the Prepetition Obligations owing to the Secured Parties.
The Debtors have grossly overstated the value of the Prepetition Collateral, incomprehensibly relying on an outdated appraisal of its inventory assets as of December 31, 2019, which expressly states that it does not account for the economic disruption caused by the coronavirus pandemic, and which, under the most ideal circumstances, projects that the value of the inventory will diminish after July 1, 2020.
Moreover, the near future of the retail industry, as well as the success of the Halloween holiday in 2020, is shrouded in pervasive uncertainties. Any assertion by the Debtors that an equity cushion in July 2020, August 2020, or September 2020 will provide sufficient adequate protection to the Secured Parties is blind hope that the coronavirus pandemic will not affect the Debtors’ Halloween sales. A speculative equity cushion dependent on contingencies is simply insufficient adequate protection to the Secured Parties to allow the granting of a priming DIP Facility that will surely impair the interests of the Secured Parties."
The present DIP motion states, “The Debtors, their owner-operator principals (the 'Beige Family') and professionals have been working tirelessly since the Court’s June 26 ruling to address the issues raised by the Court and the adequate protection concerns of the Bank Group regarding the Debtors’ prior motion to approve a $50 million 'full priming' lien DIP Facility from JMB Capital [Dkt No. 89].
The Debtors, with the collateral support of the Beige Family, have obtained substantial concessions from JMB to provide an enhanced adequate protection package to the Bank Group. Specifically, the DIP Facility is reduced from $50 million to $45 million and is now significantly closer to what the Court indicated it would approve as it maintains the Bank Group’s first lien on (i) projected $32.8 million actual accounts receivable generated from the use of their cash collateral as of July 10, and (ii) $8.64 million representing the cash surrender value under several life insurance policies owned by the Debtors (“Insurance”), which together provide for more than full first lien coverage of the Bank’s outstanding non-contingent indebtedness. Moreover, the adequate protection junior liens and claims in the Debtors’ collateral and “last look” real estate collateral afford the Bank Group a substantial additional equity cushion. Since the Court’s ruling, however, the Bank Group’s settlement terms have become more onerous (including a demand for an expedited transaction with un-obtainable benchmarks, and requests for unspecified amounts of Beige Family collateral) than those reflected in the joint letter of June 25 to the Court [Dkt No. 171]. To accept their terms would surely lead to the liquidation of the Debtors. And while the Bank Group would likely recover in full on their claims in that scenario, a 70-year old Long Island-based, family business will cease, approximately 430 employees will lose their jobs, customers will not receive their Halloween orders, and the recovery to general unsecured creditors, whose claim pool will swell by millions, will be greatly diminished.
This should not be how the story ends for Rubie’s Costume Company. The Debtors are operating at or above plan. Despite the Covid-19 pandemic, customers continue to support them by placing new orders, not reducing or canceling orders. And with the Beige Family’s agreement to pledge certain of their personal real estate as “last look” collateral, the DIP Lender has materially changed the prior DIP Facility’s “full priming” lien terms to partial priming, which serves to significantly reduce risk to the Bank Group and enhance their adequate protection. This, after a robust DIP loan solicitation effort established that no better market terms are available to the Debtors.
The Debtors are party to an October 2018 credit agreement (the “Credit Agreement”) with a bank group consisting of Bank of America, NA, Wells Fargo Bank, NA, JP Morgan Chase Bank, NA, TD Bank, NA, Citibank, NA, and HSBC Bank, USA, NA (the “Bank Group”) with HSBC serving as Administrative Agent. The Credit Agreement initially provided for lending facilities of $150.0mn in the aggregate. As at the Petition date, $46.7mn was owed to the Bank Group ($35.0mn of loans and $11.7mn letters of credit).
About the Debtors
According to the Debtors: "Family owned and operated for over 65 years, Rubie’s Costume Company is the largest designer, manufacturer and distributor of Halloween costumes and accessories in the world! We remain true to our founders’ vision by continually offering innovative products and a variety of styles for the whole family to enjoy, including pets! With the 3rd generation playing such an integral role in our future, we’re confident Halloween with Rubie’s will continue to flourish for years to come.
The Beige Declaration adds: :Rubie’s, a New York corporation, is a designer, manufacturer and distributor of costumes and related accessories with a wide ranging portfolio of non-exclusive licenses including, but not limited to: Marvel, Warner Brothers, Nickelodeon, Disney and Lucasfilm. Historically, the Company’s growth has been through sales of products with designs driven by the strength of these non-exclusive third-party licensing agreements, as well as rising interest among both adults and children in dressing up as authentic movie and television characters.
The remaining Debtors are each in the costume and party supply industry, as set forth in more detail below. 4.Rubie’s operates or contracts with manufacturing facilities throughout the world and has worldwide wholesale distribution of its products. It often licenses widely recognized designs from leading worldwide content providers such as Warner Brothers, Disney, and Marvel and currently maintains approximately 75 licenses in the United States. Rubie’s is part of a corporate structure consisting of approximately twenty-eight companies and entities that are referred to herein collectively as the “Rubie’s Group.”"
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