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Belk Inc. – Nation’s Largest Privately-Held Retailer Publishes Solicitation Prepackaged Plan and Disclosure Statement for Anticipated One-Day Stay in Chapter 11; RSA Has Debtors Shed $450mn, Debt Maturities Extended and $225mn of New Capital

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January 28, 2021 – Privately-held Belk Inc. ("Belk," or the "Debtors"), a retailer with 291 stores across 16 southeastern states, has published a Prepackaged Plan and a related Disclosure Statement that it is in the process of distributing to stakeholders.

In a January 26th press release, Belk announced that it had entered into a Restructuring Support Agreement (the "RSA," attached to the Disclosure Statement at Exhibit C) with its equity sponsor, Sycamore Partners, and holders of over 75% of its first lien term loan debt and 100% of its second lien term loan debt; with the RSA detailing an agreed plan to recapitalize the business, including through eliminating approximately $450.0mn of debt and extending maturities on all term loans until July 2025.

The press release notes that Belk had "entered into a Restructuring Support Agreement (the 'RSA') with its majority owner, Sycamore Partners, a private equity firm specializing in consumer, retail and distribution investments, and holders of over 75% of its first lien term loan debt and holders of 100% of its second lien term loan debt on a plan to recapitalize the business, significantly reduce debt by approximately $450 million, and extend maturities on all term loans to July 2025. Under the terms of the RSA, Sycamore Partners will retain majority control of Belk. The retailer has received financing commitments for $225 million in new capital from Sycamore Partners, leading global investment firms KKR and Blackstone Credit, and certain existing first lien term lenders (the 'Ad Hoc First Lien Lender Group'). Pursuant to the RSA, members of an ad hoc crossover lender group led by KKR Credit and Blackstone Credit (the 'Ad Hoc Crossover Lender Group') and other participating lenders will acquire a minority ownership in Belk."

The Debtors are to file in the United States bankruptcy Court for the Southern District of Texas which has played host to some of the nation's most significant recent retail bankruptcies (eg JC Penney and Neiman Marcus).

Highlights

  • Nation's Largest Privately Held Retailer (291 stores) to file for Bankruptcy with $1.91bn of Funded Debt
  • Belk to File Prepackaged Plan by February 24th and Emerge by February 26th
  • Debtors Cite Shift away from In-store Shopping and COVID-19 as Leading to 32% Drop in Annual Topline Sales
  • RSA Backed by Sponsor Sycamore Partners, 75% of Holders of First Lien Term Loan Debt Lenders and 100% of Second Lien term Loan Debt
  • Prepackaged Plan to Reduce Debt by $450mn with Remaining Debt Maturities Extended to July 2025
  • Sycamore, KKR and Blackstone to Contribute $225mn in New Capital

Plan and RSA Overview

The Disclosure Statement provides: "After extensive, arm’s-length negotiations, the Consenting Lenders [ie holders of first and second lien term loan debt that are signatories to the RSA], the Sponsor, and the Debtors arrived at the transactions embodied in the RSA, a copy of which is attached hereto as Exhibit B. The RSA and chapter 11 plan term sheet attached as Exhibit B to the RSA (the ‘Restructuring Term Sheet’) contemplate a swift restructuring that is supported by the Sponsor, holders of more than 75 percent of the outstanding principal amount under the First Lien Term Loan Facility, and 100 percent of the outstanding principal amount under the Second Lien Term Loan Facility. Given the overwhelming support for the Debtors’ restructuring, the Debtors elected to pursue an expedited prepackaged restructuring to maximize value by minimizing both the costs of restructuring and the impact on the Debtors’ businesses. The Debtors anticipate commencing the Chapter 11 Cases on or before February 24, 2021, and requesting confirmation of the Plan on the same day, or as soon as reasonably practicable thereafter….the RSA contains certain milestones, including both securing confirmation of the Plan and the occurrence of the Effective Date by February 26, 2021 and additional milestones as set forth herein."

The Plan provides, among other things, that upon the Effective Date:

  • All outstanding and undisputed General Unsecured Claims against the Debtors will be unimpaired and unaffected by the chapter 11 cases and will be paid in full in cash or reinstated and satisfied in the ordinary course of business in accordance with the terms and conditions of the particular transaction giving rise to such claim; 
  • All Allowed Priority Tax Claims, Other Priority Claims, and Other Secured Claims will be paid in full in cash, or receive such other customary treatment that renders such Claims unimpaired under the Bankruptcy Code;
  • Each Holder of an Allowed ABL Facility Claim will receive, at the election of such Holder, either: (a) payment in cash of its Allowed ABL Facility Claim and replacement or cash collateralization of all issued and undrawn letters of credit in the amounts specified under the ABL Credit Agreement; or (b)(i) its pro rata share of refinanced loans under the New ABL Facility in an amount equal to the principal amount of ABL Facility Claims held by such Holder as of the Effective Date, and (ii) cash in an amount equal to the accrued but unpaid non-default interest payable to such Holder under the ABL Credit Agreement as of the Effective Date (if any); 
  • Each Holder of an Allowed First Lien Term Loan Claim will receive New FLSO Loans in a principal amount equal to 55.0% of such Holder’s Allowed First Lien Term Loan Claim; provided, that all accrued and unpaid amortization and interest (at the default rate) on the principal amount of such Claim through the Petition Date shall be paid in full in cash on the Effective Date;
  • Each Holder of an Allowed Second Lien Term Loan Claim will receive (i) New FLSO Loans in a principal amount equal to 15.0% of such Holder’s Allowed Second Lien Term Loan Claim; (ii) New Second Lien Term Loans in a principal amount equal to 20.0% of such Holder’s Allowed Second Lien Term Loan Claim; and (iii) its pro rata share of 34.9% of the New Common Stock; provided, that all accrued and unpaid interest (at the default rate) on the principal amount of such Claim through the Petition Date shall be paid in full in cash on the Effective Date; and
  • All Interests will be Reinstated, subject to dilution on account of the New Common Stock, and the legal, equitable, and contractual rights to which holders of Interests are entitled shall otherwise remain unaltered.

Advisors                 

Kirkland & Ellis LLP is serving as legal adviser, Lazard is serving as financial adviser and Alvarez & Marsal North America, LLC is serving as restructuring adviser to Belk. Latham & Watkins LLP is serving as legal advisor to Sycamore Partners. Willkie Farr & Gallagher LLP is serving as legal advisor and PJT Partners LP is serving as financial advisor to the "Ad Hoc Crossover Lender Group" and O'Melveny & Myers LLP is serving as legal advisor and Evercore is serving as financial advisor to the "Ad Hoc First Lien Lender Group".

Key Dates

  • Deadline to Commence Solicitation: January 26, 2021
  • Voting Deadline: February 5, 2021
  • Plan Confirmation Hearing: February 24, 2021
  • Deadline for Plan Effectiveness: February 26, 2021

The following is a summary of classes, claims, voting rights and expected recoveries showing changes in bold (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. Projected claims are $83,834,000 and estimated recovery is 100%.
  • Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Projected claims are $14,800,000 and estimated recovery is 100%.
  • Class 3 (“ABL Facility Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Projected claims are $383,000,000 and estimated recovery is 100%.
  • Class 4 (“First Lien Term Loan Claims”) is impaired and entitled to vote on the Plan. Projected claims are $999,400,000and estimated recovery is 55.1% – 81.1%FN. Each Holder of an Allowed First Lien Term Loan Claim shall receive, in full and final satisfaction of such Claim New FLSO Loans in a principal amount equal to 55.0% of such Holder’s Allowed First Lien Term Loan Claim; provided, that all accrued and unpaid amortization and interest (at the default rate) on the principal amount of such Claim through the Petition Date shall be paid in full in Cash on the Effective Date.
  • Class 5 (“Second Lien Term Loan Claims”) is impaired and entitled to vote on the Plan. Projected claims are $550,000,000 and estimated recovery is 35.0%FNEeach Holder of an Allowed Second Lien Term Loan Claim shall receive, in full and final satisfaction of such Claim (i) New FLSO Loans in a principal amount equal to 15.0% of such Holder’s Allowed Second Lien Term Loan Claim;(ii) New Second Lien Term Loans in a principal amount equal to 20.0% of such Holder’s Allowed Second Lien Term Loan Claim; and (iii) its Pro Rata share of 34.9% of the New Common Stock; provided, that all accrued and unpaid interest (at the default rate) on the principal amount of such Claim through the Petition Date shall be paid in full in Cash on the Effective Date.
  • Class 6 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Projected claims are $443,000,000 and estimated recovery is 100%.
  • Class 7 (“Intercompany Claims”) is unimpaired/impaired deemed to accept/reject and not entitled to vote on the Plan.
  • Class 8 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 9 (“Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.

FN: The estimated recovery percentages for Classes 4 and 5 are based on the face value of new debt consideration and are not inclusive of (a) the proposed treatment of accrued and unpaid interest at the default rate on such principal amount of Claims through the Petition Date, which shall be paid in full in Cash on the Effective Date as set forth in the Plan; and (b) the value of New Common Stock. To the extent the New Common Stock outstanding on the Effective Date is valued at book value, the estimated recovery range for Class 4 Claims would be 55.1% – 86.4% and the estimated recovery range for Class 5 Claims would be 68.9% – 73.7%, in each case, excluding accrued and unpaid interest at the default rate.

The following documents were attached to the Disclosure Statement: 

  • Exhibit A: Plan of Reorganization
  • Exhibit B: RSA 
  • Exhibit C: Financial Projections
  • Exhibit D: Liquidation Analysis

Also (pages refer to Disclosure Statement pdf):

  • RSA (p 149)
  • Restructuring Term Sheet (p 182)
  • New Credit Facilities Term Sheet (p 199)
  • New FLFO New Money Commitment Letter (p 213)
  • Backstop Commitment Letter (p 219)
  • Equity Term Sheet (p 238)

Exit Capital Structure

The capital structure of the Reorganized Debtors upon the Plan Effective Date shall consist of the following:

(i) a first lien term loan credit facility (the “New First Lien Credit Facility”), which shall be available to be drawn or otherwise made available to the Borrower (as defined in Exhibit 1 hereto) on the Plan Effective Date and shall be comprised of:

(ii) a $300 million term loan tranche, consisting of (A) $225 million of new money term loans (the “New FLFO New Money Loans”) and (B) $75 million of new term loans rolled up from the First Lien Term Loans (the “New FLFO Roll-Up Loans”, and together with the New FLFO New Money Loans, the “New FLFO Loans”); and

(a) up to $822 million (or to be reduced to $815 million after giving effect to any amortization payments on or prior to the the Plan Effective Date) exchange term loan tranche, secured by a first-priority lien on a “second-out” priority basis (“New FLSO Loans”);

(b) a second lien term loan credit facility (the “New Second Lien Credit Facility”, together with the New First Lien Credit Facility, the “New Credit Facilities”), which shall be available to be drawn or otherwise made available to the Borrower on the Plan Effective Date and shall be comprised of a $110 million exchange term loans, secured by a second-priority lien (“New Second Lien Term Loans”, together with the New First Lien Term Loans, the “New Term Loans”);

(iii) the ABL Facility; and

(iv) new common stock issued by the parent entity of the Reorganized Debtors on the Plan Effective Date, after giving effect to the Restructuring Transactions, which for the avoidance of doubt may be Fashion Holdings Intermediate LLC or a new entity formed to acquire, directly or indirectly, substantially all of the assets of the Company Parties (“Reorganized Belk Holdings”, and the new common stock or comparable equity interests issued by Reorganized Belk Holdings, the “New Common Stock”), resulting in the following pro forma ownership percentages: (a) 50.1% held by Fashion Holdings LLC, following the issuance of the New Common Stock to be issued pursuant to clauses (b) and (c) below, (b) 34.9% held by holders of Second Lien Term Loan Claims, and (c) 15% held by Existing Lenders that elect to fund their pro rata share of $125 million of the New FLFO New Money Loans.

Events Leading to the Anticipated Chapter 11 Filings

The Debtors' Disclosure Statement notes: "Belk, along with many other retail companies, has faced a challenging commercial environment in recent years brought on by increased competition among retailers and an ongoing shift away from in-store shopping. Given Belk’s sizable store portfolio—with approximately 291 stores across 16 states—and its associated operating expenses, the business has relied heavily on physical consumer traffic, and resulting sales conversion, to meet sales and profitability goals. Amid these macroeconomic headwinds, Belk has taken proactive measures to remain competitive, including expanding its e-commerce platform, closing underperforming stores, and streamlining its workforce. 

Additionally, between May 2019 and October 2019, Belk entered into certain amendments to the ABL Credit Agreement, the First Lien Term Loan Credit Agreement, and the Second Lien Term Loan Credit Agreement to extend the maturity date of a substantial portion of the funded debt obligations under the facilities. Prior to the COVID-19 pandemic, Belk had a manageable liquidity cushion and was proactively taking steps to right-size its operations and further improve the long-term health of its balance sheet. 

The restrictions resulting from legally imposed measures, combined with radically altered behavior by consumers, precipitated an unprecedented decline in economic activity. Demand for discretionary retail products has plummeted during the COVID-19 pandemic as consumers prioritize—with good reason—their health and maintaining a source of income. In this environment, most discretionary retail products are an unnecessary luxury for many consumers. Additionally, online sales are not as profitable as store sales due to the cost of shipping. As a result of these and other factors, the Debtors’ sales have materially declined from forecasts. The Debtors’ top-line sales were down 32 percent year-over-year for the period commencing the third week of March 2020 through December 2020. 

While COVID-19 is not the sole cause of Belk’s current liquidity crisis, the pandemic has undoubtedly been a catalyst for Belk’s declining liquidity position and its current inability to satisfy upcoming debt service obligations."

Prepetition Indebtedness

As of January 25, 2021, the Debtors have approximately $1.91bn of funded debt (exclusive of outstanding letters of credit), consisting of:

  • $357.50mn outstanding in principal amount under the ABL Facility;
  • $999.45mn outstanding in principal amount under the First Lien Term Loan Facility; and 
  • $550.00mn outstanding in principal amount under the Second Lien Term Loan Facility. 

The Debtors also have approximately $83.83mn of outstanding capital lease obligations. 

FN8 Exclusive of approximately $25.5mn of outstanding letters of credit.

Liquidation Analysis (please see Exhibit D to the Disclosure Statement for notes)

About the Debtors

According to the Debtors: "Charlotte-based Belk, Inc., a privately-owned department store, opened its first store in 1888, beginning a legacy of selling great products at great prices, treating customers like family and giving back to the community. Today, Belk serves customers at nearly 300 Belk stores in 16 Southeastern states, at belk.com and through the mobile app. For over 130 years, Belk has proudly put customers and community at the center of what they do, supporting local charities, organizations and families when they need it most."

Corporate Structure

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The post Belk Inc. – Nation’s Largest Privately-Held Retailer Publishes Solicitation Prepackaged Plan and Disclosure Statement for Anticipated One-Day Stay in Chapter 11; RSA Has Debtors Shed $450mn, Debt Maturities Extended and $225mn of New Capital appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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