Brooks Brothers Group, Inc. – Debtors Get Nominally Improved DIP Financing in Last-Minute Change of DIP Lenders; Tensions Between Rival Bidder Camps Mount

July 10, 2020 – In developments that will have caused some to flashback to the dramatic, and ultimately disastrous (for the Debtors), Barneys bankruptcy of last summer, fellow New York retailing institution Brooks Brothers Group, Inc. has had a chaotic, last-minute, all-change development as to its debtor-in-possession ("DIP") financing arrangements. 

In a flurry of last-minute filings before a July 10th first day hearing, the Debtors swapped out WH HOLDCO, LLC, an affiliate of WHP Global, for ABG-BB, an affiliate of Authentic Brands Group ("ABG") as the provider of their DIP financing. The replacement financing was approved by Judge Sontchi at the July 10th hearing [Docket No. 118].

Variations to the terms of the replacement DIP financing include (i) an increase of $5.0mn in the amount to be borrowed (that $5.0mn also now coming slightly earlier in the Chapter 11 process) and (ii) a total elimination of interest which some are calling "extraordinary" but in reality is relatively small potaoes [in an expected three-month transaction (the sale completion milestone is 88 days from the Petition date), the Debtors stand to save approximately $2.0mn, this number 25% less if we use the 68 day sale completion milestone in the replaced facility]. 

There are also some suggestions that there are to be no fees either, but the fee heading is still in the proposed credit agreement; albeit with "[reserved]" now inserted (as opposed to deleted altogether). The bottom line is that we will not have a complete idea of what the economics are for ABG until we see details as to the Debtors' imminent choice of a stalking horse (probably this Monday, given the Debtors have five days from the Petition date to file their bidding procedures motion) and an understanding of what the break-up fee, and other bidder protections, are for that stalking horse. 

If ABG is the stalking horse, as now seems the likely scenario, it will minimally get a break-up fee (normally 3%) and have its costs covered; but ABG is NOT principally motivated by the fees. Like WH HOLDCO, which it now replaces as the presumptive choice as stalking horse, it wants an advantage in the upcoming sale process which will pit ABG (possibly in a widely rumored consortium including Simon Property Group and Brookfield Property Partners) against WH Global, the brand-management firm backed by Oaktree Capital and BlackRock, and which already owns the Anne Klein and Joseph Abboud brands. 

For both groups, fees and interest (or lack thereof) being a largely moot point in the event that they become the successful bidder.

Lets spare a thought for WH Global (and their attorneys Fried Frank, now replaced by Paul Weiss as counsel to the DIP agent) who will have had a miserable Friday afternoon. In their DIP motion of only two days ago, and after a supposedly comprehensive solicitation process, the Debtors insisted that they had the best DIP deal in hand: "[the WH Global DIP] was the best option for the Company based on, among other things, the proposed structure and the amount of funding provided.  Further, the other proposals required a roll up of prepetition debt and a stalking horse agreement in place on the Petition Date." 

As to the "other proposals," the Debtors continued: "The Debtors solicited nine (9) potential DIP providers, including four (4) third-party lenders, three (3) parties that [investment bankers] PJ Solomon also approached in relation to the sale process, and the Company’s existing secured lenders." It seems almost certain that the other parties approached "in relation to the sale process" included ABG. In which case, it appears that ABG had a requirement in its bid that a stalking horse agreement be in place on the Petition date; the lack of that requirement probably being the most attractive feature of the WH HOLDCO DIP bid to the Debtors' board.

Whether they were included in the DIP financing solicitation process or not, probably does not matter (beyond increasing the howls of foul play); either way, the Debtors (and the bankruptcy Court/process) gave them a chance to see the winning bid and then trump it. An aggressive, and potentially deal-destabilizing, practice which we most recently saw writ large in respect of Barneys.

Barneys (RIBP)..an Aside

On August 9th of last year we wrote as to Barneys: "On August 7, 2019, the Court hearing the Barneys New York cases issued an order authorizing the Debtors to access $75.0mn in debtor-in-possession (“DIP”) financing to be provided by Gordon Brothers and Hilco Global. In frantic, last-minute developments, that has all changed. The Debtors have now filed a notice to amend the earlier order…as the Court's first order made its way to the top of the Court's out tray…a major rewrite of the Debtors' DIP financing had already been submitted by the Debtors….The last minute scramble seems a bit more Filene's Basement (RIBP, rest in bankruptcy peace) than Barneys, but the Debtors, who now have a commitment for $218.0mn of DIP financing, will care little about the financing documents strewn across the Court room floor.

In any event, Gordon Brothers and Hilco, who otherwise would have been combining the roles of DIP lenders and store closing consultants, are out as DIP lenders and apparently Brigade Capital Management, LP and BRF Finance Co. (a subsidiary of B. Riley Financial) are in…" 

Back to Brooks Brothers

The circumstances were quite different at Barneys, where two groups were fighting for control of a fee-heavy store closing process and a fee heavy DIP financing at a debtor, which absent real heavyweight going concern buyer interest, was probably always going to end up in liquidation; albeit perhaps not in such a shambolic and maligned fashion.

The hardball last-minute tactics are, however, quite similar; even as to the chaotic strewing of papers and last-minute filings [The Debtors' attorneys filed the replacement DIP financing twice and were forced to file a "Notice of Withdrawal" as to the second filing, leaving for a few moments, at least, of real doubt as to whether there was replacement financing and which deal was actually still in play].

Will this impact the nature of the Debtors' Chapter 11 cases? Probably. WH Global will be fuming that they have been pipped to the post position, if not quite yet to the post itself. Will that lead to more aggressive bidding? Objections? Retirement from the field of battle? We shall soon see (WH Global for the moment quiet on the matter); a Monday bidding procedures motion deadline looming for the Debtors. Regardless, there is a real tension mounting and that does not usually bode well for a clean and quick bankruptcy.

Clearly the stakes in respect of an acknowledged retail jewel are enormous and the players extremely deep-pocketed. To add to the tension, this face-off of titans is being played out at a moment unparalleled in retail history; as huge players assess the bargains available in the retail ruins and speculate on the nature of the new retail order that will inevitably emerge from the ashes.

The New DIP financing

The now approved DIP financing [Docket No. 118] is comprised of $80.0mn of new money term loans, of which $60.0mn will be made available with the Court's interim interim order (ie, now). These are increases of $5.0mn from the $75.0mn and $55.0mn being offered in the previous DIP financing. As with that first proposed DIP financing, $32.5mn will be used to repay amounts borrowed from Gordon Brothers' affiliate Brand Funding, LLC in the run-up to the Debtors' chapter 11 filings (the "Prepetition Term Loan Obligations").

The Debtors' DIP motion, albeit promoting the now replaced funding [Docket No. 25], stated: “The DIP Financing and use of Cash Collateral…provides the Debtors with necessary liquidity, on reasonable terms and customary budget covenants. The relief sought in this Motion is critical for the Debtors to pay their ordinary-course operating expenses, finance these chapter 11 cases, pursue the Debtors’ marketing and sale process for all or substantially all of their assets, and maximize value and the opportunity to protect the interests of their approximately 4,000 employees.

As of the Petition Date, the Debtors have approximately $2 million in cash on hand and thus require immediate access to the DIP Financing and authority to use Cash Collateral to ensure that they have sufficient liquidity to operate their business and pursue the sale process. The DIP Lender has committed to provide the Debtors with DIP Financing in an aggregate amount of $75 million to finance these chapter 11 cases and support the sale process.

[t]he unprecedented health and economic impact of the COVID-19 pandemic has taken a heavy toll on the Brooks Brothers business, and the Debtors have been forced to close nearly all of their owned retail and factory outlet stores worldwide to protect the health of their employees. As a result, in the months leading up the Petition Date, the Debtors were left with severely limited liquidity. The global pandemic struck as Brooks Brothers was conducting a capital raise process initiated in April 2019 and led by PJ Solomon. The Debtors were able to obtain $32.5 million of financing in May and June 2020 secured by the previously unencumbered Prepetition Term Loan Collateral from the Prepetition Term Loan Lenders to meet the Debtors’ ongoing liquidity needs while they examined their store footprint, strategically prepared their store re-opening plan, and pursued a value-maximizing restructuring or possible sale transaction.

Without additional financing and the ability to use Cash Collateral, the Debtors will be in a negative cash position in the coming days.”

Key Terms of the Replacement DIP Facility

• Borrowers: Brooks Brothers Group, Inc. and Golden Fleece Manufacturing Group, LLC (collectively, the “Borrowers”).
• Guarantors: RBA Wholesale, LLC, Brooks Brothers International, LLC, Retail Brand Alliance Gift Card Services, LLC, Retail Brand Alliance of Puerto Rico, Inc., and 696 White Plains Road, LLC (collectively, the “Guarantors,” and together with the Borrowers, the “DIP Loan Parties”).
• DIP Lenders: Each Person holding a Term Loan or Commitment from time to time.
• Administrative Agent: ABG-BB, LLC 
• Borrowing Limits: The Borrowers may make two (2) borrowings under the Commitments, (x) the first of which will occur on the Closing Date in aggregate amount of $60.0mn (or such lesser amount as is specified in the Interim DIP Order) (the “Initial Borrowing”) and (y) the second of  which  will  occur  at  least  five  (5)  Business  Days  prior  to  the  Maturity  Date  in  an  aggregate  principal  amount not to exceed the difference between $80.0mn and the amount of the Initial Borrowing (or such lesser amount as is specified in the Final DIP Order) (the “Final Borrowing”) 
• Interest Rate: 0% per annum (reduced from 11%).
• Default Rate: The interest rate otherwise applicable plus 2% per annum.
• Fees: [Reserved]
• Maturity Date: The earlier of (a) six (6) months after the Petition Date, (b) the substantial consummation of a plan of reorganization filed in the Chapter 11 Cases that is confirmed pursuant to an order entered by the Bankruptcy Court, (c) the consummation of a sale of all or substantially all of the assets of the Lead Borrower and its Subsidiaries, (d) the date that is thirty-five (35) days after the Petition Date if the Bankruptcy Court has not entered the Final DIP Order, (e) the date on which the Obligations become due and payable, whether by acceleration or otherwise, (f) the date of conversion of any of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code unless otherwise consented to in writing by the Agent, (g) the date of filing or express written support by any debtor in the Chapter 11 Cases of a plan of liquidation or reorganization and related disclosure statement, or order of dismissal, in each case, that is not an Acceptable Wind-Down, unless otherwise consented to in writing by the Agent and (h) the date of dismissal of any of the Chapter 11 Cases.     
• Milestones: The following milestones (collectively, the “Milestones” and each a “Milestone”), which may be extended or modified with the consent of the Required Lenders:

1. On the Petition Date, the DIP Loan Parties shall have filed a motion with the Bankruptcy Court seeking approval of the Interim DIP Order and Final DIP Order;
2. On or before the date that is five (5) calendar days after the Petition Date, the DIP Loan Parties shall have filed the Bid Procedures Motion with the Bankruptcy Court;
3. On or before the date that is three (3) Business Days after the Petition Date, the Bankruptcy Court shall have entered the Interim DIP Order, in form and substance satisfactory to the Agent;
4. On or before the date that is thirty-five (35) calendar days after the Petition Date, the Bankruptcy Court shall have entered the Final DIP Order;
5. On or before the date that is thirty-five (35) calendar days after the Petition Date, the Bankruptcy Court shall have entered the Bid Procedures Order;
6. On or before the date that is fifty-three (53) calendar days after the Petition Date, the Bankruptcy Court shall have entered an order approving the Approved Sale (as defined below) (the “Sale Order”), which shall be in form and substance satisfactory to the Agent as confirmed by the Agent in writing; and
7. On or before the date that is sixty-eight (88 changed from 68) calendar days after the Petition Date, the Lead Borrower shall have consummated the sale of substantially all of the assets of the DIP Loan Parties to the party determined to have made the highest or otherwise best bid for the Lead Borrower’s assets in accordance with the Sale Order and that results in Net Proceeds allocated to the DIP Collateral sufficient to repay the Obligations in full in cash (the “Approved Sale”).

Prepetition Indebtedness

As of the Petition date, the Debtors have outstanding funded debt obligations in the amount of approximately $386.0mn in aggregate:

About the Debtors

Established in 1818, Brooks Brothers was the first American brand to offer ready-to-wear clothing and has continued throughout history with iconic product introductions including: seersucker, madras, argyle, the non-iron shirt and the original polo button-down collar. Over two centuries later, Brooks Brothers is proud to uphold the same traditions and values and to be the destination for ladies and gentlemen from every generation. Since its founding 202 years ago in New York, Brooks Brothers has become a legendary international retailer with over 250 stores in North America and 500 worldwide in 45 countries while maintaining a steadfast commitment to exceptional service, quality, style and value.

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