December 30, 2020 – The Debtors filed their Third Amended Plan of Reorganization, with technical modifications representing changes to the solicitation version filed on November 23, 2020 [Docket No. 1403].
The Debtors’ Plan confirmation hearing, initially scheduled for January 14, 2021, has been adjourned and is now scheduled for February 25, 2021 [Docket No. 1405]. The Debtors' asset sale motion, filed on November 25, 2020, indicated that the confirmation hearing would be adjourned until February 19, 2021 at the earliest if the sale closes [Docket No. 1212].
The Third Amended Plan adds details related to the Debtors' sale transaction and noted an increase of the cash component of GUC Trust assets to $7.25mn from $6.5mn.
The Debtors' Memorandum [Docket No. 1136] provides the following pre-confirmation hearing overview: “The Debtors stand poised to achieve a remarkable result — confirmation of a chapter 11 plan of reorganization that will deleverage their balance sheet by approximately $1 billion, preserve the business as a going-concern, save thousands of jobs and position the Debtors to meet their long-term strategic goals, thereby enabling the Debtors to continue their focus on generating profitable growth and driving value for customers and stakeholders alike. Both prior to and throughout the chapter 11 cases, the Debtors engaged in good-faith, hard-fought negotiations with their key constituents on the terms of this restructuring. The Plan is a culmination of those robust discussions and has been accepted by substantially all Classes, including by holders of approximately 97.25% of the Debtors’ outstanding Term Loan Claims. The overwhelming support for the value-maximizing transactions embodied in the Plan has provided the Debtors with a clear and viable path to exit from chapter 11 and achieve long-term financial success.
The Plan incorporates the terms of a global settlement among every major creditor constituency in the case, receiving support from the ABL Lenders, the Term Loan Lenders and the Creditors’ Committee. In light of the extremely difficult circumstances caused by the COVID-19 pandemic, the Debtors were forced to file for chapter 11 to realize the benefits of their Strategic Plan, which contemplated a substantial rationalization of the Debtors’ brand and store fleet portfolio, a realignment of distribution capabilities and implementation of various other cost saving measures.
The terms of the Debtors’ restructuring are embodied in the Restructuring Support Agreement (the ‘RSA’), dated as of July 23, 2020 and amended as of September 9, 2020, which contemplates a series of restructuring transactions – ultimately embodied in the Plan – that will (if consummated) equitize over $1 billion of the Debtors’ outstanding Term Loans, repay DIP, administrative and priority claims in full, provide for a pro rata share of certain cash and specified litigation proceeds to the Debtors’ general unsecured creditor constituency and provide two committed exit facilities necessary to execute the Debtors’ go-forward business plan. At the time of execution, the RSA had the support of certain Term Loan Lenders holding approximately 68% of the outstanding principal amount under the Term Loan Agreement and, following an amendment and a number of additional Term Loan Lenders signing joinder agreements to become Consenting Stakeholders, support for the RSA grew to approximately 94.62% of the outstanding Term Loan Claims.
Additionally, on September 8, 2020, the Debtors agreed to a Global Settlement with the Creditors’ Committee, the Consenting Stakeholders and the DIP Lenders, the terms of which include the support of the Creditors’ Committee in favor of the Plan. All of the ABL Lenders have also agreed to vote in favor of the Plan and support the Debtors’ emergence by committing to fund an asset-based lending revolving exit facility. Largely, as a result of the substantial support secured through the Debtors’ extensive efforts to build consensus, the Debtors are set to achieve confirmation of the Plan….
Unsurprisingly, given the overwhelming support of the Plan, the Debtors received only a handful of formal objections to confirmation, unrelated to cure and assumption objections, which the Debtors will address in their reply brief filed prior to the Confirmation Hearing. The Debtors have consensually resolved a substantial number of the cure objections and hope and expect to resolve the others in the near term… the Debtors’ respectfully submit that the Court should overrule any objections not consensually resolved prior to the Confirmation Hearing (more on outstanding objections below).”
The amended Disclosure Statement [Docket No. 565] provides, “The pre-negotiated restructuring will deleverage the Debtors’ balance sheet by more than $1 billion and provide for an infusion of $150 million in new money…If the Plan is confirmed, Ascena will shed more than $1 billion of funded debt upon emergence from these Chapter 11 Cases. Ascena’s pro forma exit capital structure will consist of (a) a $400 million Exit ABL Facility, (b) a $311.8 million First Out Exit Term Loan Facility, (c) a $88.2 million Last Out Exit Term Loan Facility and the New Common Stock.
Specifically, the Plan contemplates the following Restructuring Transactions:
- the ABL Lenders have agreed to provide a $400 million debtor-in-possession financing facility that will convert to a $400 million Exit ABL Facility upon satisfaction of certain conditions and emergence from these chapter 11 cases;
- all Term Loan Lenders will receive the opportunity to participate in the $75 million New Term Loan Financing, which will be funded initially in the form of a debtor-in-possession financing facility;
- the Term Loan Lenders that have agreed to backstop the New Term Loan Financing will fund the remaining $75 million of the New Term Loan Financing on the same economic terms;
- all Term Loan Lenders that participate in the New Term Loan Financing will have $161.8 million of their prepetition Term Loans rolled up into the debtor-in-possession financing, and the aggregate $311.8 million in loans will be converted to a new first-out term loan facility upon emergence from these chapter 11 cases;
- all Term Loan Lenders will also receive their pro rata share of: (a) 55.1% of the equity in Reorganized Ascena; and (b) participation in $88.2 million of new second-out term loans;
- all Consenting Stakeholders will have the opportunity to receive their pro rata share (based on their holdings of loans under the new first-out term loan facility described above) of 44.9% of the equity in Reorganized Ascena upon emergence from these chapter 11 cases;
- holders of general unsecured claims will receive their pro rata share of the GUC Trust Net Assets; and
- Interests in Ascena will be cancelled, released and extinguished without any distribution.”
The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):
- Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 3 (“ABL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 4 (“Term Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,110,000,000 and expected recovery is 45.6%. To the extent the Debtors consummate the Sale Transaction on or prior to the Effective Date, each holder of a Term Loan Claim will receive its Pro Rata share of the Net Lender Distributable Cash; to the extent the Debtors do not consummate the Sale Transaction on or prior to the Effective Date, each holder will receive its Pro Rata share of (a) participation in the loans arising under the Second Out Exit Term Loan Facility; and (b) 55.1% of the New Common Stock, subject to dilution on account of the Management Incentive Plan and the Equity Premium; and (iii) the Excess Cash.
- Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $700,000,000 to $800,000,000 and expected recovery is 1.1% to 1.3%. Each Holder of a General Unsecured Claim will receive its Pro Rata share of the GUC Trust Net Assets. GUC Trust Net Assets are the GUC Trust Assets minus trustee expenses, with GUC Trust Assets defined as: “(i) cash in the amount of $7,250,000; and (ii) 100% of the first $1 million and 50% of the next $4 million of proceeds (if any) received by Ascena resulting from Target Corp. et al. v. Visa Inc. et al., case no. 1:13-cv-03477, currently pending in the U.S. District Court for the Southern District of New York, net of any costs incurred by Ascena in connection therewith. Any such proceeds in excess of $5 million (and 50% of proceeds between $1 million and $5 million) will be retained by the Reorganized Debtors.”
- Class 6 (“Intercompany Claims”) is unimpaired/impaired and not entitled to vote on the Plan.
- Class 7 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 8 (“Interests in Ascena”) is impaired, deemed to reject and not entitled to vote on the Plan.
On November 13, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 1135], which were as follows:
- Class 4 (“Term Loan Claims”): 250 claim holders, representing $1,141,617,958.71 (or 98.93%) in amount and 97.28% in number, accepted the Plan. 7 claim holders, representing $12,356,318.55 (or 1.07%) in amount and 2.72% in number, rejected the Plan.
- Class 5 (“General Unsecured Claims”): 281 claim holders, representing $82,585,205.93 (or 90.19%) in amount and 87.54% in number, accepted the Plan. 40 claim holders, representing $8,979,520.14 (or 9.81%) in amount and 12.46% in number, rejected the Plan.
On December 8, 2020, the Court issued an order approving the $540.0mn private sale of the Debtors' remaining businesses, comprised of the Lane Bryant brand and the Premium business segment (the latter including Ann Taylor, LOFT, and Lou & Grey brands) to Premium Apparel LLC (the “Buyer”), an affiliate of Sycamore Partners Management, L.P. (collectively, “Sycamore”) [Docket No. 1295]. The Sycamore asset purchase agreement (the “APA”) is attached to the order at Exhibit 1 (also attached are the related Assumption Agreements, the Bills of Sale and Assignment Agreements, the Intellectual Property Assignment Agreements, and the Escrow Agreement).
In a press release announcing the proposed transaction, the Debtors stated: "Premium Apparel will acquire the brand assets for a purchase price of $540 million, on a cash-free and debt-free basis, subject to certain adjustments, and the assumption of certain liabilities. Under the APA, Premium Apparel has committed to retaining a substantial portion of the retail stores and associates affiliated with these brands.
The transaction is expected to be completed by mid-December. As previously disclosed, FullBeauty Brands Operations, LLC has completed its acquisition of Catherines’ intellectual property assets and e-commerce business, and Justice Brand Holdings LLC, an entity formed by Bluestar Alliance LLC, has completed its acquisition of the intellectual property of Justice."
The Debtors' sale motion elaborates, "Concurrently with executing the Purchase Agreement, the Debtors and the consenting Term Lenders executed an amendment to the Restructuring Support Agreement providing for, among other things, extension of the applicable milestones to allow for the consummation of the Sale Transaction and support for an amended Plan that will provide for the distribution of the Sale Transaction proceeds and other cash on hand. The amended Plan provides for sufficient reserves to pay all administrative, priority and other claims required to be paid under the Plan. In the event the Sale Transaction does not close, the amended Restructuring Support Agreement provides for the Term Lenders’ continued support for the recapitalization transactions embodied in the original Plan and Restructuring Support Agreement. In the event the Sale Transaction closes, there will be no material difference in the Plan treatment of the Debtors’ stakeholders other than the holders of the Term Loan Claims, a substantial majority of which are bound by the Restructuring Support Agreement to support the Sale Transaction and the amended Plan. Contemporaneously with filing this motion, the hearing to consider confirmation of the Plan was continued to December 15, 2020. In the event the Sale Transaction closes, the confirmation hearing will be further continued in accordance with the Purchase Agreement to a date not before February 19, 2021."
According to the Memorandum, the Debtors believe that they have resolved, or will be able to resolve, all Objections with the exception of an Objection filed by the United States Trustee [Docket No. 746], the objection by the U.S. Securities and Exchange Commission [Docket No. 849] and the Securities Lead Plaintiffs’ Objection [Docket No. 889]. The document states, “For the reasons that will be set forth in their reply brief that will be filed prior to the Confirmation Hearing, the Debtors respectfully request that the Court overrule the remaining Objections and confirm the Plan.”
The U.S. Trustee’s Objection acknowledges that some issue’s previously raised were resolved, but notes that “The Amended Plan in its current form cannot be confirmed because the assumption of insider benefit programs violates section 1129(a)(1), the proposed third-party releases and exculpation clauses are overly broad and the deemed acceptance voting provision is inappropriate. Confirmation should be denied. Alternatively, the Court should strike the offending provisions from the Plan.”
The SEC states in its objection that the Plan should not be confirmed, “because the Plan contains a third-party release, binding upon the Debtors’ public shareholders, that does not meet the standard for approval in this Circuit. Under the Plan, shareholders will receive nothing, their shares will be canceled and they are not allowed to vote. As if that is not bad enough, the Debtors further seek to bind shareholders to a third-party release that would eliminate whatever remaining rights they may have as shareholders against non-debtors. This includes claims arising from egregious conduct, such as fraud, willful misconduct, breach of fiduciary duty and violations of securities laws.
Under Fourth Circuit law, third-party releases must be essential to the reorganization and fair, and thus, releases should be approved cautiously and infrequently. The release in this case falls far short of that standard. The release by shareholders clearly is not essential to the reorganization because the Debtors have implemented a process that allows shareholders to opt out of the release, and the Plan may be confirmed regardless of how many shareholders opt out. Further, the release is not fair because the shareholders are not receiving any meaningful consideration in exchange for the release, and the parties protected by the release are contributing nothing of value that will benefit the shareholder class. Recognizing that the third-party release is neither essential nor fair, the Debtors apparently are seeking to avoid the ‘fair and essential’ standard entirely, by arguing that the release is ‘consensual.’ According to the Debtors, any shareholder who fails to timely return an opt-out form is voluntarily electing to be bound to the release. This position, however, is unsupportable because (i) no reasonable shareholder would agree to be bound to a release (that covers all types of conduct, including fraud) in exchange for nothing, and (ii) the prevailing view in this District and elsewhere is that ‘consent’ requires an affirmative act, not mere silence.”
Meanwhile, the Securities Fraud Action Lead Plaintiffs argue in their objection, “Through the Third-Party Release contained in the Amended Plan, the Debtors seek to completely disenfranchise Proposed Class members – who are receiving nothing under the Amended Plan, who are not entitled to vote on the Amended Plan and who, to the extent they received notice at all, may have received only minimal notice. Yet, the Debtors, with the intent to eliminate Proposed Class members’ only source of potential recovery, have engineered the requirement that Proposed Class members affirmatively opt out of the Third-Party Release to avoid being deemed to have ‘consented’ to the Third-Party Release. Even more offensive is the fact that the Non-Debtor Defendants – two former directors and officers of Ascena who oversaw the Debtors’ downfall – have provided no contribution whatsoever in exchange for a gratuitous Third-Party Release. Neither the Amended Plan nor the Amended Disclosure Statement even attempt to offer any factual or legal justification for such an overreaching and fundamentally improper release, because there is none. On this basis alone, the Amended Plan is fatally flawed and unconfirmable.
In addition, the Amended Plan cannot be confirmed because it does not disclose whether or how the Debtors intend to preserve evidence potentially relevant to the Securities Litigation after the Effective Date of the Amended Plan; and does not disclose whether or how Lead Plaintiffs and the Proposed Class will be able to pursue Class Claims against the Debtors to the extent of available insurance.”
The following documents were attached to the Disclosure Statement [Docket No. 565]:
- Exhibit A: Plan of Reorganization
- Exhibit B-1: Restructuring Support Agreement
- Exhibit B-2: Restructuring Support Agreement Amendment
- Exhibit C: Corporate Structure Chart
- Exhibit D: Disclosure Statement Order
- Exhibit E: Financial Projections
- Exhibit F: Valuation Analysis
- Exhibit G: Liquidation Analysis
Liquidation Analysis (see Exhibit G of Disclosure Statement [Docket No. 565] for notes)
About the Debtors
According to the Debtors: “ascena retail group, Inc. (Nasdaq: ASNA) is a national specialty retailer offering apparel, shoes, and accessories for women under the Premium Fashion segment (Ann Taylor, LOFT, and Lou & Grey), Plus Fashion segment (Lane Bryant, Catherines and Cacique) and for tween girls under the Kids Fashion segment (Justice). ascena retail group, Inc. through its retail brands operates ecommerce websites and approximately 2,800 stores throughout the United States, Canada, and Puerto Rico.”
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