February 24, 2021 – The Court hearing the Belk Inc. cases issued an order approving the Debtors' Prepackaged Chapter 11 Plan of Reorganization [Docket No. 61]; with the Debtors quickly filing a notice of effectiveness in respect of this one-day prepack. Also filed were (i) two Plan Supplements attaching more than 1,500 pages of exit finance and governance documents and (ii) an objection from the U.S. Trustee hearing the Debtors' cases (the "U.S. Trustee") which raised the standard arguments against one-day prepacks, but who was undoubtedly resigned to the fact that its objections would be rejected by a Court that had already agreed to shepherd a one-day Plan through to its conclusion.
The Court's willingness to entertain and process one-day stays in Chapter 11 will further add to the debate as to their appropriateness, even as it burnishes its credentials as an alternative to the other court with the ability and willingness to oversee them, Judge Drain's U.S. Bankruptcy Court in the Southern District of New York. Judge Marvin Isgur (of the U.S. Bankruptcy Court in the Southern District of Texas who also oversaw the Sheridan Holding Co. I LLC) now draws level with Judge Drain with two major one-day prepacks since 2019 (Judge Drain overseeing FullBeauty Brands Inc. and Sungard Availability Services).
In this case at least, general unsecured creditors seem to be genuinely unimpaired and the restructuring/recapitalization involves existing players in the capital structure; but it is the overall process (and not case particular fact sets) that concerns the U.S. Trustee. Can Debtors and their supporting stakeholders ever respect established bankruptcy process in a one-day pre-pack and is there really a valid justification to so radically truncate the process?
The U.S. Trustee sums up its objection: "The Debtors seek to confirm a plan within hours of filing for bankruptcy, which would enable them to race through chapter 11 too quickly and deprive parties-in-interest, governmental agencies, and the Court sufficient time to evaluate – let alone respond or object to – the Plan. The process here sharply deviates from the Bankruptcy Code’s qualified and carefully crafted authorization of pre-packaged bankruptcy plans...the Debtors provide virtually no legal or factual justification for the extraordinary relief they request here beyond a conclusory assertion of immediate and irreparable harm that would result from prolonged chapter 11 cases [as noted below, the Debtors' justification for a one-day process is that their restructuring support agreement required it and because they had not otherwise put financing arrangements in place; although prepetition lenders and sponsor Sycamore Partners, which will maintain majority ownership of Belk, are signatories to that RSA and presumbaly were in position to finance a slightly longer stay in Chapter 11]…The Debtors simply have not made a showing for the drastically expedited relief."
Exit Press Release
In a press release heralding their exit from Chapter 11, the ephemeral former Debtors noted: "As a result of the restructuring, Belk has received $225 million of new capital, significantly reduced its debt by approximately $450 million and extended maturities on all term loans to July 2025.
The infusion of cash and reduction in debt provides Belk with increased liquidity to focus on its key initiatives for growth, including further enhancements to its omnichannel capabilities and the expansion of merchandise offerings into new, relevant product categories. Belk is growing its merchandise assortments in popular areas like home, wellness and outdoor, and plans to continue diversifying its inventory to fit the evolving lifestyle of its customers, all while strengthening its $1 billion+ and growing e-commerce segment."
On February 23, 2021, Belk Inc. and 17 affiliated Debtors (“Belk” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 21-30630 (Judge Isgur). At filing, the Debtors, retailers with 291 stores across 16 southeastern states, noted estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn.
The Debtors were represented by (i) Jackson Walker LLP as bankruptcy counsel (ii) Kirkland & Ellis LLP as legal advisor, (iii) Lazard as financial advisor, (iv) Alvarez & Marsal North America, LLC as restructuring adviser and (v) Prime Clerk LLC as claims agent.
In a declaration filed in support of the Debtors' Chapter 11 filings (the "Langley Declaration" [Docket No. 8]), the Debtors' chief financial officer William Langley stated, "Following an appropriate notice period, the Debtors commenced these Chapter 11 Cases to implement this restructuring through their joint prepackaged plan of reorganization (the 'Plan'). If the Plan is not confirmed on February 24, 2021, the Debtors’ lack of material cash or committed interim financing, combined with the resulting termination rights under the Restructuring Support Agreement, would lead to significant disruption and uncertainty and could potentially result in a liquidation.
Because the Plan (a) has been accepted by Holders of approximately 99% of First Lien Term Loan Claims (Class 4), 100% of Second Lien Term Loan Claims (Class 5) and 100% of the equity interests in Debtor Fashion Holdings Intermediate LLC (Class 9) – the voting Class under the Plan and – (b) pays all other non-funded debt claims in full in the ordinary course, a stop in chapter 11 for anything more than 24 hours will serve not one stakeholder’s interest. On the contrary, absent confirmation today, the entire enterprise will be at risk, threatening severe damage to the business, the loss of approximately 17,000 jobs, the closing of 291 stores and the disappearance of a value maximizing — and fully consensual — restructuring."
In a February 8, 2021 press release, the Debtors advised that: "Belk today reaffirmed that it expects to complete its financial restructuring through an expedited 'pre-packaged, one-day' reorganization. The company expects to file for Chapter 11 on February 24, 2021, and anticipates that the confirmation hearing to approve the restructuring will be held on the same day.
Lenders holding 99% of Belk's first lien term loan and 100% of Belk's second lien term loan have now entered into the previously announced Restructuring Support Agreement (the "RSA"), evidencing near unanimous term loan lender support for Belk's "one-day" reorganization. The RSA enables Belk to raise $225 million of new capital, significantly reduce debt by approximately $450 million, and extend maturities on all term loans to July 2025.
Belk plans to continue normal operations throughout its financial restructuring. Under the RSA, suppliers will be unimpaired and will continue to be paid in the ordinary course for all goods and services provided to the company. Customers will continue to receive the quality merchandise and service they expect when shopping at Belk's stores across the Southeast and online at Belk.com.
Under the terms of the RSA, Sycamore Partners will retain majority control of Belk. Belk has secured 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'). Belk has also secured an extension of the early consent deadline for additional lenders to provide commitments for the $225 million of new capital. The commitment deadline [was] extended to 4:00 p.m. Central Time on February 11, 2021, although additional commitments are not required for successful completion of the restructuring. 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.
On January 28, 2021, privately-held Belk Inc. published a Prepackaged Plan and a related Disclosure Statement.
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."
Plan and RSA Overview
The Langley Declaration explains, "The restructuring support agreement attached hereto as Exhibit C (the 'Restructuring Support Agreement') provides for a realignment of the capital structure through a deleveraging of $450 million of First and Second Lien Term Loan debt and the infusion of $225 million in new money to fund the business going forward.
The Restructuring Support Agreement is supported by holders of approximately 99% of the Debtors’ First Lien Term Loans and holders of 100% of the Second Lien Term Loans. It is also supported by the Debtors’ Sponsor – the investment fund managed by, and other Affiliates (excluding any of the Debtors or Reorganized Debtors) of Sycamore Partners Management L.P. in their capacity as indirect holders of interests (collectively, ('Sycamore'), whose retention of majority ownership of reorganized Belk was important to the other parties due to Sycamore’s valuable multi-channel retail experience and expertise.
The Restructuring Support Agreement allows Belk to satisfy all trade, customer, and other non-funded debt obligations in full, maintain its approximately 17,000 workforce and keep open all 291 stores. Importantly, the Restructuring Support Agreement requires confirmation of the Plan on the Petition Date."
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 a First Lien Term Loan Claim will 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 will 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%FN. Eeach Holder of a Second Lien Term Loan Claim will 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 Second Lien Term Loan Claim;(ii) New Second Lien Term Loans in a principal amount equal to 20.0% of such Holder’s 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 will 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 will 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.
On February 23, 2021, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 33] which were as follows.
- Class 4 (“First Lien Term Loan Claims”): 279 claim holders, representing $990,109,812.62 (100%) in amount and 100% in number, voted in favor of the Plan.
- Class 5 (“Second Lien Term Loan Claims”): 10 claim holders, representing $550,000,000.00 (100%) in amount and 100% in number, voted in favor of the Plan.
- Class 9 (“Interests”): Accepted the Plan.
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
The Debtors filed a Plan Supplement at Docket No. 38 (amended at Docket No. 64) which attached the following documents:
- Exhibit A: Schedule of Retained Causes of Action [Docket No. 64]
- Exhibit B: Description of Transaction Steps [Docket No. 38]
- Exhibit C: Form of New First Lien Credit Facility Documents [Docket No. 64]
- Exhibit D: Form of New ABL Facility Documents [Docket No. 64]
- Exhibit E: Form of Second Lien Credit Facility Documents [Docket No. 64]
- Exhibit F: Form of New Organizational Documents [Docket No. 38]
- Exhibit G: Form of New Shareholders Agreement [Docket No. 64]
- Exhibit H: 1129(a)(5) Disclosures Regarding Directors and Officers [Docket No. 38]
Exit Capital Structure
The capital structure of the Reorganized Debtors upon the Plan Effective Date will consist of the following:
(i) a first lien term loan credit facility (the “New First Lien Credit Facility”), which will be available to be drawn or otherwise made available to the Borrower (as defined in Exhibit 1 hereto) on the Plan Effective Date and will 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 will be available to be drawn or otherwise made available to the Borrower on the Plan Effective Date and will 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 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."
U.S. Trustee Objection
The objection provides: "The Debtors seek to confirm a plan within hours of filing for bankruptcy, which would enable them to race through chapter 11 too quickly and deprive parties-in-interest, governmental agencies, and the Court sufficient time to evaluate – let alone respond or object to – the Plan. The process here sharply deviates from the Bankruptcy Code’s qualified and carefully crafted authorization of pre-packaged bankruptcy plans. Indeed, those parties-in-interest fortunate enough to be aware of the filing of these chapter 11 cases were saddled with a deadline to object to the Plan and Disclosure Statement – as well as lengthy supporting documentation – before the Petition Date. The commencement of a bankruptcy case provides all parties with corresponding rights and obligations. The Debtors here want to have their cake and eat it too by foisting obligations onto others before shouldering the responsibilities held by Court-supervised debtors-in-possession. Similarly, the pace of these proceedings has spawned a litany of practical problems that range from the inability to create an evidentiary record to support the sweeping findings that the Debtors ask this court to make in the confirmation order to the inability of landlords to understand if leases will be assigned without their consent. Accordingly, the lack of adequate notice renders the Plan unconfirmable.
In this case, the Debtors’ breakneck schedule precludes parties from meaningfully inquiring into the terms of the Plan, from examining the Debtors using the ordinary discovery tools available in contested matters, and from objecting to the Plan in a considered way. By scheduling a combined hearing on the Disclosure Statement and Plan a few hours after they were filed and setting an objection deadline prior to the Petition Date, there is inadequate time for parties in interest and the Court to consider the Plan and any potential objections they might raise, or to understand the process and import of the Debtors’ proposals. The process here sharply deviates from the Bankruptcy Code’s qualified and carefully crafted authorization for prepackaged chapter 11 restructurings. While a properly managed prepackaged bankruptcy case can reduce the duration and costs associated with a long, drawn-out bankruptcy case, the expedited relief requested here represents a dramatic departure.
Taken together, the Debtors provide virtually no legal or factual justification for the extraordinary relief they request here beyond a conclusory assertion of immediate and irreparable harm that would result from prolonged chapter 11 cases….The Debtors simply have not made a showing for the drastically expedited relief. The cases were filed mere hours before the scheduled hearing on confirmation, without providing interested parties with a meaningful opportunity to seek discovery or file an objection because the objection deadline occurred prior to the commencement of this case. While several key constituencies may have had ample opportunities to assess these documents, others, who are just learning about these cases for the first time, including government entities, such as the taxing authorities, have not."
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.
The Debtors are controlled by Sycamore Partners.
Liquidation Analysis (please see Exhibit D to the Disclosure Statement for notes)
About 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. For more information visit https://newsroom.belk.com/.
About Sycamore Partners
Sycamore Partners is a private equity firm based in New York. The firm specializes in consumer, distribution and retail-related investments and partners with management teams to improve the operating profitability and strategic value of their business. With approximately $10 billion in aggregate committed capital raised since its inception in 2011, Sycamore Partners' investors include leading endowments, financial institutions, family offices, pension plans and sovereign wealth funds. For more information on Sycamore Partners, visit www.sycamorepartners.com.
Corporate Structure Chart
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