January 17, 2023 – Party City Holdco Inc. and 13 affiliate debtors (NYSE: PRTY; "PCHI" or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 23-90005 (Judge TBA). The Woodcliff Lake, N.J.- based Debtors, “a global leader in the celebrations industry” (770 owned stores and 53 franchised stores), are represented by John F. Higgins of Porter Hedges LLP. Further board-authorized engagements include: (i) Paul, Weiss, Rifkind, Wharton & Garrison LLP as general bankruptcy counsel, (ii) AlixPartners, LLP as financial advisors (and to provide a CRO), (iii) Moelis & Company LLC as investment bankers, (iv) A&G Realty Partners as real estate advisor and (v) Kroll Restructuring Administration LLC as claims agent.
Davis Polk & Wardwell LLP is serving as legal counsel and Lazard is serving as investment banker to the Ad Hoc Group.
The Debtors’ lead petition notes between 10,000 and 25,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn (as of September 30, 2022, assets and liabilities were $2,869,248,000 and $3,022,960,000, respectively). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Ankura Trust Company, LLC (as trustee in respect of $92.3mn of 6.625% Senior Notes due 2026), (ii) Wilmington Trust, National Association as trustee respect of $22.9mn of 6.125% Senior Notes due 2023) and (iii) Dah Loong Development ($7.4mn trade debt claim).
Highlights
- 823 Store "Celebrations Industry" Leader Files for Bankruptcy with over $3.0bn of Debt ($1.45bn Funded Debt)
- Debtors Cite Lingering Impact of COVID, Supply Chain Issues (Including as to Russian Helium), Less Festive Consumers and Inflationary Pressures
- Executes Restructuring Support Agreement (the "RSA," Filed at Docket No. 11) with Holders of 70% of $750.0mn First Lien Notes (the "Ad Hoc Group") that Anticipates Equity Rights Offering and "Expedited Restructuring" Completed During Q2 2023
- Holders of $750.0mn "Fixed Rate Notes" and $161.7mn "Floating Rate Notes" (see Indebtedness Table below)* to Exchange Debt for Reorganized Equity
- Ad Hoc Group to Provide $150.0mn of New Money DIP Financing
- Engages Real Estate Advisors A&G Realty Partners to Assist in "Right-Sizing" of Lease Portfolio
*Each holder of a Secured Notes Claim (ie Fixed and Floating Rate Notes) shall either receive (i) its pro rata share of the equity of the reorganized Company (the “Reorganized Equity” and of the applicable entity, the “Reorganized Company” to be determined by the Debtors with the consent of the Required Consenting Noteholders), subject to dilution by the Rights Offering, the Management Incentive Plan (as defined herein), and, to the extent applicable, the DIP Equitization or (ii) such other treatment as agreed between the Debtors and the Required Consenting Noteholders."
In a press release announcing the filing, PCHI advised that it: “has entered into an agreement with an ad hoc group of holders of more than 70% of the Company's senior secured first lien notes (the 'Ad Hoc Group') to support an expedited restructuring that would substantially reduce PCHI's debt and optimize its capital structure and liquidity…. The Company's subsidiaries outside of the U.S., its Party City franchise stores, and its Anagram business, which is the global market leader in foil balloons, are not part of the Chapter 11 proceedings and will continue as core components of the PCHI enterprise….The restructuring is expected to be completed in the second quarter of 2023.
Brad Weston, the Debtors' Chief Executive Officer, commented: "In the face of pandemic headwinds, a global supply chain crisis, and other macroeconomic challenges that have faced our industry, we have made significant strides in PCHI's ongoing transformation – establishing a solid foundation for long-term growth and continued success as the market leader in the celebrations space…"
Goals of the Chapter 11 Filings
The Olofsky Declaration (defined below) notes: "…to implement an expeditious, pre-negotiated restructuring that will ensure the long-term viability of PCHI. Under the terms of the restructuring, the Company expects to deleverage its balance sheet and gain access to significant new capital pursuant to an equity rights offering. The reduction in the Debtors’ funded debt will allow the Company to focus on long-term growth and, in turn, strengthen its competitive position in the market. The Debtors also intend to utilize the tools provided to them in chapter 11 to right-size their lease portfolio.
Restructuring Support Agreement
On January 17, 2023, the Debtors entered into a Restructuring Support Agreement (the “RSA”) with certain holders (collectively, the “Consenting Noteholders”) of (a) Party City Holdings Inc.’s senior secured first lien floating rate notes due 2025 (the “Floating Rate Notes”) and (b) Party City Holdings Inc.’s 8.750% senior secured first lien notes due 2026 (the “Fixed Rate Notes,” and collectively with the Floating Rate Notes, the “Secured Notes”).
The Debtors "anticipate that additional holders of First Lien Notes will sign the Restructuring Support Agreement, adding to the already overwhelming support for the proposed restructuring and ensuring the success of these chapter 11 cases." The RSA envisions a restructuring of the Debtors’ funded indebtedness and an infusion of new capital through an equity rights offering. The terms of the proposed transactions, otherwise summarized below, are set forth in a restructuring term sheet (the 'Term Sheet') attached as an exhibit to the RSA (itself attached to Docket No. 11).
In a January 18th 8-K, the Debtors provide: "The RSA and the accompanying restructuring term sheet contemplate, among other things:
- the entry into a debtor-in-possession financing facility with the Consenting Noteholders in the amount of $150 million;
- the (a) equitization of the Secured Notes in exchange for the equity of the reorganized Company, subject to dilution by any Reorganized Securities issued pursuant to the Rights Offering to be consummated at emergence from the Chapter 11 Cases, the Management Incentive Plan, and, to the extent applicable, the Reorganized Securities issued to lenders who provide backstop commitments under the DIP Facility in consideration for their backstop commitments or (b) such other treatment of the Secured Notes as agreed by the Required Consenting Noteholders
- either repayment in cash upon emergence of the amounts outstanding under the ABL Credit Agreement and the FILO Agreement (each as defined below) with proceeds from a third-party financing or, with the agreement of the holders thereof, the rolling of such outstanding amounts into a new asset-based lending exit facility, in each case acceptable to the Debtors and the Required Consenting Noteholders;
- the treatment of general unsecured claims to be governed by the terms of the Plan and be acceptable to the Debtors and the Required Consenting Noteholders; and
- the cancellation, extinguishment and discharge of the existing common stock of the Company and any other equity securities of the Company, with existing equity in the Company receiving no recovery or distribution."
DIP Financing
PCHI has secured a commitment from the Ad Hoc Group for $150.0mn ($75.0mn with interim DIP order) in new money debtor-in-possession ("DIP") financing which the debtors believe will "provide ample liquidity to support continued operations during the process across the Company's retail and consumer products divisions…" The DIP Facility has a five-month term with interest at the "Secured Overnight Financing Rate plus 10%." The DIP Facility also provides for an
upfront commitment premium of 8% and annual undrawn commitment fee of 0.5%.
Additionally, as consideration for their agreement to fully backstop the DIP Facility, each member of the Ad Hoc Group will receive (a) the opportunity to convert their DIP Facility loans into equity (or equity-linked securities) in connection with any rights offering and chapter 11 plan or (b) if a chapter 11 plan is not consummated, payment of its pro rata share of a cash fee equal to 10% of the outstanding loans under the DIP Facility, in each case, subject to the terms set
forth in the Restructuring Support Agreement.
Lease Portfolio Rationalization
"To optimize their operations, the Debtors intend to utilize the tools provided to them under the Bankruptcy Code to right-size their lease portfolio
through contract rejection….The Debtors and their advisors are assessing which locations are underperforming (whether due to poor performance, over-market lease terms, or a determination that it is otherwise not commercially beneficial or feasible to renew such leases on current terms) and should be
subject to lease restructuring negotiations with landlords or closed altogether.
The Debtors have already filed a "Rejection Motion" to reject 28 unexpired leases for "retail stores that the Debtors have determined to be unnecessary and burdensome to their estates and have been closed and vacated prior to the Petition Date….the Debtors, with the assistance of A&G and their other advisors, remain in active negotiations with certain of their landlords with respect to the potential restructuring of existing lease terms. Although ongoing, the Company is hopeful that these negotiations will lead to further lease concessions and modifications that will allow additional stores to remain open into the future."
Events Leading to the Chapter 11 Filing
The Debtors continue to suffer from the long term impacts of COVID. "Robbed" of $174.0mn of EBITDA in 2020 by the requirement to shutter its stores, the capital starved Debtors have had to pare back on strategic initiatives and deal with lingering changes in consumer habits (eg smaller parties). The Debtors' long COVID has been made worse by supply chain issues, with the Debtors particularly highlighting shortages of helium (for balloons) and Russia's important role in the global helium market. Add to the list, (i) inflationary pressures (beyond the now inflated costs of inflating balloons) including as to labor and transport, and (ii) the knock on impact of these combined operational issues (and the attendant further tightening of liquidity) on credit and vendor relationships.
In a declaration in support of first day filings (the “Orlofsky Declaration”) [Docket No.11], AlixPartners' David Orlofsky (now serving as the Debtors' CRO) provides: “Everything changed…when the COVID-19 pandemic forced the Company to close all of its stores and demand for gathering-oriented party products plummeted. No retail operations led to reduced revenue, thus interrupting the implementation of strategic initiatives and forcing the Company to actively manage its capital structure to stay afloat.
Yet while all of its stores have since reopened, the pandemic cost the Company $174 million of EBITDA in 2020, robbing the Company of the capital necessary to implement its NXTGEN upgrades and other important strategic initiatives. In addition, the Company’s operations have continued to be affected by the lingering effects of COVID-19, including changes in consumer purchasing behavior (e.g., hosting smaller gatherings and purchasing fewer party products as a result), supply chain challenges resulting from increased transportation and distribution costs, and increased labor costs. Despite the Company’s efforts to manage its financial position and liquidity, the Company’s operations continue to be negatively impacted in key ways.
First, while the Company has experienced a rebound in sales and turnaround in demand since the height of the COVID-19 pandemic, it continues to manage through the challenges from earlier and continuing supply chain disruptions and increased costs. Global supply chain disruptions have significantly strained the Company’s ability to manufacture products and bring them to market. With shortages of necessary supplies and inventory across the Company’s portfolio, competition for available materials is steep, exacerbating inflation-induced cost pressures.
A global shortage of helium gas due primarily to decreased supply from major producers, including Russia, has also negatively impacted the Company’s bottom line. The Company is one of the largest individual purchasers of helium in the United States and primarily purchases it through long-term helium supply contracts. In turn, PCHI uses helium to offer balloon inflation services through its retail operations and for quality assurance and control purposes with respect to balloons that the Anagram Entities manufacture. Additionally, PCHI’s sales of metallic balloons to consumer products purchasers typically decline as the supply of helium decreases.
Even in instances where the Company is able to source enough helium (albeit at a higher price) from its suppliers, the increased costs associated with such purchases result in additional strains on the Company’s profitability. In light of these issues, the Company has invested in research and development initiatives aimed at developing new technologies to utilize less helium to inflate a balloon, along with air-filled balloons as an alternative.
….Second, labor shortages and rising labor costs generally are affecting the Company, both in its manufacturing and transportation of goods. Suppliers are working with smaller labor forces and the trucking industry is suffering from a decline in available drivers—both of which result in increased costs, delays, and difficulties in obtaining products. The Company is also dealing with these issues internally as it seeks to maintain a sufficient workforce in the face of low employment rates and significantly rising wages.
Finally, liquidity constraints have limited the Debtors’ investment in strategic initiatives (such as modernizing stores) and strained vendor relationships. Many of the Debtors’ vendors have ceased providing ordinary trade credit and begun requiring cash in advance and/or prepayment on future orders before shipping goods."
Prepetition Indebtedness
The following table depicts the Debtors’ prepetition capital structure:
The Debtors' Q3 10-Q provides:
Significant Prepetition Shareholders (common shares)
- BlackRock Inc: 6.37%
- The Vanguard Group Inc: 5.32%
About the Debtors
According to the Debtors: “Party City Holdco Inc. (PCHI) is a global leader in the celebrations industry, with its offerings spanning more than 70 countries around the world. PCHI is also the largest vertically integrated designer, manufacturer, distributor, and retailer of party goods in North America.
PCHI team members demonstrate a daily commitment to the company's Brand Purpose: to inspire joy by making it easy for customers to create unforgettable memories.
PCHI operates across multiple businesses within its Retail Division and Consumer Products Division. On the retail side, Party City (partycity.com) is the leading omnichannel retailer in the celebrations category, operating more than 800 company-owned and franchise stores as well as Halloween City (halloweencity.com) seasonal pop-up stores. The Consumer Products Division includes design and manufacturing entities Amscan, an industry leader in celebration décor, tableware, costumes, and accessories, and Anagram, the global market leader in foil balloons.
PCHI is headquartered in Woodcliff Lake, N.J. with additional locations throughout the Americas and Asia.”
Corporate Structure (see Docket No. 11)
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