May 25, 2021 – The Debtors filed a first amended combined Plan of Liquidation and Disclosure Statement (the "Combined Document") and a blackline showing changes to the version filed on May 5, 2021 [Docket Nos. 737 and 738, respectively]. The Combined Document, filed on the eve of a hearing at which approval of the Disclosure Statement element will be considered, now adds further recovery details and a liquidation analysis. Also added is disclosure as to expected but not yet received tax refunds in respect of 2019 and 2020. These refunds constitute the lion's share of potentially distributable proceeds and the Combined Document now warns that administrative claims may be delayed (up to 6 months) subject to receipt of an expected 2019 refund ($2.5mn). The application for the 2020 refund ($30.7mn) has not yet been filed. The knock-on effect of delayed (or even uncertain) tax refunds includes a new health warning for general unsecured creditors who are now advised that they may receive a 0% recovery and that anything returned to their class will have to wait "until all Allowed Senior Claims have been paid in full."
See below for the new language on the tax refunds which combine an interesting (if not necessarily confidence inspiring) mix of CARES Act and net operating loss (NOL) elements, with a bankruptcy context undoubtedly further adding to the complexity.
Update – On May 26th, the Court hearing the FHC Holdings Corporation cases issued an order approving (i) the Disclosure Statement element (conditionally) of the Debtors’ First Amended Combined Disclosure Statement and Plan, (ii) proposed Plan solicitation and voting procedures and (iii) a proposed timetable culminating in a July 20th Plan confirmation hearing [Docket No. 743].
Plan Overview
On December 3, 2020, FHC Holdings Corporation (f/k/a Francesca’s Holdings Corporation and three affiliated Debtors (Nasdaq: FRAN; “Francesca’s” or the “Debtors”) filed for Chapter 11 protection with estimated assets of $264.7mn and estimated liabilities of $290.5mn (including funded debt of $13.5mn and deferred rent of $36.8mn).
In a filing date press release, the Debtors, a specialty retailer offering a “diverse and balanced mix of apparel, jewelry, accessories and gifts” (558 boutiques in 45 states), advised that they intend “to use these proceedings to implement a sale process focused on the Company’s core retail locations as well as its promising digital expansion and new brand launches. That process culminated in an $18.0mn January 2021 sale of substantially all of the Debtors’ assets to a group comprised of Francesca’s Acquisition, Tiger Capital Group and TerraMar Capital (see further below).
As discussed further below, the Debtors cited “…the negative impact of the COVID-19 pandemic on francesca’s sales along with the approximately $36.8 million in deferred lease obligations and unsustainable on-going rent obligations” as necessitating the filings.
The Combined Document [Docket No. 7377] states, “The Plan constitutes a liquidating chapter 11 plan for the Debtors that seeks to distribute the net proceeds from the sale of the Debtors’ business, provide for the termination of the Debtors’ remaining business operations, liquidate the Debtors’ remaining assets, and wind down the Debtors’ affairs in an orderly process. The Plan provides for the distribution of the Sale proceeds and any assets excluded from the Sale in accordance with the terms of the Plan and the priorities set forth in the Bankruptcy Code. Upon the conclusion of Distributions under the Plan, the Plan Administrator shall wind down the Debtors’ Estates, seek approval to close the Chapter 11 Cases, and dissolve the Debtors under applicable law.”
The following is an amended summary of classes, claims, voting rights and expected recoveries showing highlighted changes (defined terms are as in the Plan and/or Disclosure Statement):
- Class 1 (“Priority NonTax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $590,753 and the estimated recovery is 100%.
- Class 2 (“Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $241,088 and the estimated recovery is 100%.
- Class 3 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $76,696,582 and the estimated recovery is 0%-30.2%. Each holder of an Allowed General Unsecured Claim shall receive its Pro Rata share of the GUC Plan Consideration. [New language] Holders of Allowed General Unsecured Claims shall not receive any Distributions unless and until all Allowed Senior Claims have been paid in full. For the avoidance of doubt, Holders of Allowed General Unsecured Claims shall not receive any Distributions in excess of the Allowed amount of their Claim.
- Class 4 (“Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
Definitions
- “GUC Plan Consideration” means the proceeds of any Estate Assets remaining after the satisfaction in full of all Senior Claims and payment of the Plan Administrator Operating Expenses.
Key Dates
- Deadline to File Plan Supplement: June 22, 2021
- Publication Deadline: June 22, 2021
- Voting Deadline: July 9, 2021
- Confirmation Objection Deadline: July 6, 2021
- Combined Hearing: July 20, 2021
Pre-Closing Tax Refunds
The Combined Document now provides: "As of February 1, 2021, the Debtors have recorded $10.7 million of current federal income tax receivables related to a NOL carryback refund claim arising under the Coronavirus Aid, Relief and Economic Security Act (the 'CARES Act') enacted in March 2020 that allows the carryback of NOLs to prior years. The Debtors filed their federal tax returns for fiscal year 2019 on November 13, 2020, and applied NOLs to fiscal year 2019 as allowed under the CARES Act to generate a Pre-Closing Tax Refund of approximately $2.5 million, which the Debtors expect to receive within the next six months. Additionally, the Debtors are preparing their 2020 tax returns and expect that NOLs generated for tax purposes for fiscal year 2020 will be carried back as allowed under the CARES Act to generate a Pre-Closing Tax Refund of approximately $30.7 million for the 2020 fiscal year. The Debtors anticipate that, following their receipt of the Pre-Closing Tax Refund for the 2019 fiscal year, they will have sufficient Cash to pay all Allowed Administrative Claims and Allowed Priority Claims in full in Cash. However, if the amount of Allowed Administrative Claims and/or Allowed Priority Claims exceed the Debtors’ current estimates, the Debtors may require the proceeds of the Pre-Closing Tax Refund for the 2020 fiscal year to satisfy such Claims. In the event the Debtors do not have sufficient Cash to pay all Allowed Administrative Claims and/or Allowed Priority Claims on the Effective Date, such Allowed Administrative Claims and/or Allowed Priority Claims will be paid as soon as reasonably practicable after the Debtors’ receipt of sufficient Pre-Closing Tax Refunds."
Asset Sale
On January 22, 2021, the Court hearing the Francesca’s Holdings Corporation cases issued an order approving the sale of substantially all the Debtors’ assets to Francesca’s Acquisition, Tiger Capital Group and TerraMar Capital (the “Buyer”) (purchase price $18.0mn) [Docket No. 384]. The Sale closed on January 30, 2021. The asset purchase agreement (the “APA”) in connection with the sale is attached to the Sale Order as Attachment 1.
The amended Combined Document now adds furthre disclosure as to the distribution of sale proceeds: "The proceeds from the Sale of the Debtors’ Assets and the Debtors’ Cash on hand have been used, in accordance with various Bankruptcy Court orders, to pay the costs of administration of the Chapter 11 Cases, including the payment of (a) all obligations owed to the DIP Parties under or relating to the DIP Credit Agreement and the DIP Facility; (b) certain ordinary course Administrative Claims; (c) stub rent Claims for rejected leases that were reserved and required to be paid under the DIP Financing Orders; and (d) cure Claims in connection with the assumption and assignment of unexpired leases to the Buyer."
Auction Results
Despite an auction that extended across four days, five rounds and three Zoom sessions, and which the Debtors describe as "robust," the purchase price has advanced only modestly from the Stalking Horse Bidder's opener of $17.3mn notified to the Court two weeks earlier, adding $1.0mn in cash and a $1.25mn promissory note. The Debtors, who "received multiple Qualified Bids," apparently allowed several bidders to proceed with bids that did not otherwise meet a Court-approved "qualified bidder" benchmark of $17.3mn as augmented by bidder protections and a minimum overbid of $250k. In a declaration in support of the sale [Docket No. 378], the Debtors' investment banker notes as to the Debtors' decision to keep the door open to further bids that: "After consulting with the Consultation Parties, and consistent with the Bidding Procedures (which allow the Debtors, in consultation with the Consultation Parties, to modify any of the Bidding Procedures for the purpose of maximizing value for the Debtors’ estates), the Debtors determined that all of the bids constituted Qualified Bids."
In addition to the bids from the Stalking Horse and the back-up bidder, other interested/bidding parties included: (i) the pairing of Walter & Mason Retail, Inc. and Hilco Merchant Resources (ii) FA Buyer, LLC and (iii) Gordon Brothers.
The Debtors clearly gave significant weight to the Stalking Horse Bidder's commitment to keep open "least 275 francesca’s® boutiques," without providing detail as to the going concern commitment of rival bidding groups.
As to actual movement in the purchase price, the following juxtaposition of the consideration memorialized in the Stalking Horse's original APA and the description provided by the Debtors' investment banker is useful.
Original Stalking Horse APA
"…the Stalking Horse APA sets a critical floor for all future bids through a purchase price that includes, subject to certain adjustments, $17 million in cash, over $6.6 million in assumed liabilities, and caps the Debtors’ exposure to cure costs related to assumed executory contracts and leases at $2.9 million. The Stalking Horse APA also excludes from Acquired Assets the tax refunds due to the estate for fiscal year 2019, which total $2.5 million based on filed tax returns, and the tax refund due for fiscal year 2020 which is estimated to total between $9 and $12 million, leaving these valuable assets with the Debtors’ estates. The Stalking Horse APA further provides for post-closing lease designation rights and for the transfer of employees in go forward locations, which will facilitate the continuation of the Debtors’ business as a going concern."
Revised Stalking Horse APA
"The Purchase Agreement provides for a purchase price that includes, subject to certain adjustments, $18 million in cash, plus a promissory note for $1.25 million of additional consideration, the assumption of approximately $7.74 million in Assumed Liabilities, including accrued paid time off for the Debtors’ employees, and the assumption of all open customer orders and ordinary course purchase orders. The Purchase Agreement also caps the Debtors’ exposure to Cure Amounts related to assumed executory contracts and leases at $2.65 million and excludes from the acquired Assets the tax refunds due to the estate for fiscal year 2019 (which totals $2.5 million based on filed tax returns) and the tax refund due for fiscal year 2020 (which is estimated to total between $9 and $12 million), leaving these valuable assets with the Debtors’ estates. The Purchase Agreement further improves upon the Stalking Horse APA by modifying the working capital adjustments and inventory count provisions in the Debtors’ favor."
In a press release, announcing the auction results, the Debtors noted: "Stalking Horse Bidder, Francesca’s Acquisition LLC, an affiliate of TerraMar Capital LLC ('TerraMar'), and Tiger Capital LLC (collectively, the 'Buyer') was selected as the winning bidder under an enhanced asset purchase agreement. The Buyer will acquire certain assets of the Company. The Company will be sold on a going concern basis and TerraMar has committed to continuing operating at least 275 francesca’s® boutiques….The transaction is expected to close by the end of January 2021, subject to approval of the U.S. Bankruptcy Court for the District of Delaware currently set for approval on January 21, 2021. Upon the completion of the sale, the francesca’s® business will successfully exit from its Chapter 11 Bankruptcy proceeding."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Clarke Declaration”) [Docket No. 36], Andrew Clarke, the Debtors’ President and Chief Executive Officer, detailed the events leading to Francesca’s Chapter 11 filing. The [name] Declaration provides: “The Debtors’ chapter 11 filing is primarily the result of the adverse impacts of the COVID-19 pandemic on the Debtors’ revenue, results of operations, and cash flows coupled with the Debtors’ unsustainable rent obligations.
The Debtors’ revenue is highly dependent on in-store sales, which in 2019 accounted for over 90% of francesca’s net sales (through the turnaround initiatives and e-commerce enhancements discussed above, the Debtors expect that online sales will account for over 15% of total sales in 2020). While the Debtors have a significant customer base, the impact of the COVID-19 pandemic and the measures aimed at reducing the virus’ spread have caused the Debtors’ revenue to decline year-over-year. For the third quarter ended October 31, 2020, the Debtors’ net sales were approximately $79.3 million, a 17% drop from approximately $95.5 million for the same quarter in 2019.
The COVID-19 pandemic also has and continues to result in an overall disruption in the Debtors’ operations and supply chain. Beginning in March 2020, and in accordance with federal, state, and local measures, the Debtors temporarily closed all of their boutiques from March 25, 2020 to April 30, 2020. In May 2020, the Debtors were able to re-open a small number of their boutiques in locations where local shutdown orders were lifted. Since May, the Debtors have been able to re-open the majority of their boutiques, and are currently operating 558 boutiques some of which, however, continue to operate at reduced hours and/or capacity. As of the Petition Date, one of the Debtors’ boutiques in Arkansas is closed as a result of a natural disaster. In addition, the Debtors’ e-commerce and distribution center and corporate office are operating at a reduced capacity. As a result of the boutique closures, reduced store capacity, and other COVID-19 measures, traffic volume at the Debtors’ boutiques has decreased by 47% from the same time last year.
In addition, since the onset of the pandemic, the Debtors have been working closely with A&G Realty Partners to defer or obtain other relief from the rent payments due under certain of the Debtors’ boutique leases. As of December 1, 2020, the Debtors have deferred approximately $36.8 million in lease rent, both on a unilateral basis in certain instances and on a consensual basis by agreement with certain landlords.
The Debtors’ operational restructuring initiatives, however, were unable to keep pace with the impact of COVID-19 on sales and the Debtors’ ongoing rent obligations. Even with the Debtors’ cost-cutting measures, enhancements to their e-commerce platform, and broad customer base, current market conditions have made it impossible for the Debtors to obtain the capital needed to continue to maintain their business. In light of the ongoing measures related to the COVID-19 pandemic, increasing rent deferral obligations, and longer term borrowing needs, Tiger was unwilling to continue to provide funding to the Debtors without a sustainable solution.”
Prepetition Indebtedness
As of the Petition date, the Debtors’ funded debt totals approximately $13.5mn, comprised of the outstanding borrowings under the Prepetition Revolving Credit Agreement and the Prepetition Term Loan Credit Agreement (each as defined below).
- Asset Based Revolving Credit Facility: The Debtors are party to a May 2018 prepetition revolving credit agreement with Tiger Finance, LLC serving as administrative agent, which provided for aggregate revolving commitments of $40 million (the "Prepetition Revolving Credit Agreement"). On May 1, 2020, the Debtors entered into a letter agreement to obtain a waiver from their lenders of any default or event of default arising from their failure to (a) deliver annual audited consolidated financia l statements for the fiscal year ended February 1, 2020 without a “going concern” or a like qualification or exception and (b) pay rent on leased locations for the months of April, May, and June 2020. That letter agreement contains certain conditions and covenants, including that, in the case of the First Revolving Letter Agreement, the Debtors were required to use the entire $10.7 million income tax refund requested under the Corona Aid, Relief and Economic Security Act (the “CARES Act”) to repay any then outstanding borrowing.The Debtors went into cash dominion under the prepetition credit agreements on November 25, 2020 and Chase began sweeping the Debtors’ cash receipts on a daily basis. Cash receipts will continued to be swept daily to the DIP Agent, to be applied in the manner provided in the DIP Credit Agreement and Interim Order.
On December 1, 2020, Tiger Finance, LLC (“Tiger”) purchased and assumed all outstanding loans and commitments of the sole existing lender under the Prepetition Revolving Credit Agreement pursuant to that certain Assignment and Assumption Agreement and was appointed as administrative agent under the P repetition Revolving Credit Agreement. As of the Petition date, the Debtors had $3.5 million in borrowings outstanding under the P repetition Revolving Credit Agreement.
- Term Loan Credit Agreement: the Debtors are party to an August 2019 term loan credit agreement (the “Prepetition Term Loan Credit Agreement”) with Tiger, as administrative agent. The Prepetition Term Loan Credit Agreement provides for an aggregate term loan of $10 million and matures on August 13, 2022 (the “Term Loan”). As of the Petition date, the Debtors had $10.0mn of outstanding borrowings under the Prepetition Term Loan Credit Agreement.
Liquidation Analysis (see Exhibit A to Combined Document [Docket No. 737 ] for further notes)
About the Debtors
According to the Debtors: “francesca's® is a specialty retailer which operates a nationwide-chain of boutiques providing customers a unique, fun and personalized shopping experience. The merchandise assortment is a diverse and balanced mix of apparel, jewelry, accessories and gifts. As of today, francesca's® operates approximately 558 boutiques in 45 states throughout the United States and the District of Columbia and also serves its customers through francescas.com.
The Clarke Declaration adds: “francesca’s is a publicly-traded company that operates a nationwide-chain of boutiques that offer customers a differentiated shopping experience with on-trend merchandise at attractive prices in an inviting boutique environment that provides customers with a “treasure hunt” experience. The Debtors’ merchandise assortment represents a diverse and balanced mix of apparel, jewelry, accessories, and gifts. While the Debtors’ boutiques can be found in a variety of locations, including malls, strip malls, off-mall locations, and closed and open-air outlets, each of the boutiques is designed to provide customers with the feeling of shopping at a local, neighborhood boutique.
For the fiscal year ended February 1, 2020, the Debtors generated, on a consolidated basis, $407.5 million in net sales. As of November 1, 2020, the Debtors reported, on a consolidated basis, total assets of $264.7 million and total liabilities of $290.5 million."
Corporate Structure Chart
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