February 15, 2023 – Wells Fargo Bank, National Association (“Wells Fargo”), in its capacity as administrative agent and collateral agent under the Debtors' Prepetition ABL Credit Agreement, has been quick off the mark to express its dissatisfaction with the way that the Debtors are prosecuting their Chapter 11 cases, filing objections to: (i) the Debtors' proposed store closing measures [Docket No. 59], (ii) proposed DIP financing and use of cash collateral [Docket No. 55] and (iii) proposed cash management measures [Docket No. 57].
Wells Fargo also filed a declaration in support of the objections (the "Baldinelli Declaration") which attaches copies of prepetition financing agreements and Wells Fargo's prepetition correspondence with the Debtors.
With its objections, Wells Fargo paints a picture of Debtors crashing artlessly into Chapter 11, with long-term legal and financial advisors jumping (or pushed off of) a sinking ship in the hours and days leading up to the Debtors Chapter 11 filings (Wells Fargo asserts that the termination of relationships with Haynes and Boone and BDO USA LLP occurred "when the Debtors jettisoned the ABL DIP Proposal" in favor of an "entirely illusory" DIP financing alternative), and current unguided/misguided management hopelessly out of its depth as it faces the multiple challenges of a large retailer facing a second stay in bankruptcy in just over two years.
The Baldinelli Declaration (summarized below) sums up as to the alleged pre-bankruptcy chaos: "In my experience, it is exceptionally unusual for a debtor’s key advisors to all resign or to be fired in the days before a bankruptcy filing."
- The Debtors, having abruptly terminated relationships with long-term legal advisors (Haynes & Boone) and its financial advisors (BDO USA) are woefully under-advised/under-represented
- The Debtors, having undergone wholesale C-Suite/Board turnover…and without any identifiable internal restructuring experience, are likewise without internal leadership/capabilities
- The Debtors' budgeting, the inadequate size of the proposed DIP financing and "nonsensical" sale expectations make the proposed DIP funcing "entirely illusory"
- Proposed DIP is too small, too expensive and too quickly repaid
- Contrary to the Debtors' assertion that ABL claims are to be repaid in full, proposed DIP "picks and chooses" elements of ABL claims and "not a refinancing of the Prepetition ABL Obligations"
- The Debtors' store closing proposals are effort "circumvent the ABL Agent’s first-priority lien on all inventory…and apply the proceeds to obligations secured by liens of junior creditors" and thus not being conducted in good faith or meeting "business judgment' standard"
- Absent a professional iquidator, Debtors not likely to recover "reasonably equivalent value and fair market value for the subject inventory" and fall short of "'business judgment standard"
From the DIP Objection:
"After spending weeks negotiating with the ABL Lenders to provide DIP financing of a liquidating plan (the 'ABL DIP Proposal') that was carefully vetted by the Debtors’ longstanding legal counsel, Haynes & Boone, and nationally-recognized financial advisors, BDO USA LLP, and approved by a special committee of the board of directors of the Debtors (the 'Special Committee'), the Debtors decided to reject the ABL DIP Proposal, seeking approval instead of the Term DIP Proposal agented by Cantor Fitzgerald Securities for syndication to the Prepetition Term Loan Lenders and Prepetition FILO C Noteholders (collectively, the 'Subordinated Creditors')….The Debtors seek interim approval of the Term DIP Proposal and use of cash collateral, without the advice of their longstanding legal counsel and without their well-known financial advisor, both of which resigned and/or were terminated days ago when the Debtors jettisoned the ABL DIP Proposal. Rather, with brand new counsel and no financial advisor at all, the Debtors ask this Court to approve a purported $51.5 million Term DIP Proposal based on a budget that:
- was prepared internally by financial staff with no stated restructuring experienced;
- is unsupported by any inventory roll-forward analysis demonstrating the starting or ending values of the collateral that supposedly will support adequate protection liens;
- only requires the DIP Lenders to fund $25 million of new money during the first two months of the case, (i) $3.17 million of which will be used to repay the so-called prepetition Bridge Loan, (ii) $4.16 million of which will be used to pay DIP Interest and Fees, (iii) leaving a mere $17.67 million of liquidity before the DIP Lenders pay their expenses; moreover, all but $100,000 of the proposed $25 million interim advance would be repaid to the DIP Lenders within the first four weeks of these Cases;
- during the five-month budget period, requires the DIP Lenders to infuse only an additional $10 million for a total of $35 million, but only after virtually all of the initial $25 million funding has been repaid;
- does not show any paydown of over $18 million of prepetition senior secured debt during the 20 week budget period (but does show the Debtors’ professionals and others receiving $3.4 million during the first four weeks);
- nonsensically shows the Debtors generating more cash from liquidating 262 stores than the Debtors, only a week ago, projected to generate in a full-chain 462 store liquidation under the ABL DIP Proposal; and
- which supposedly adequately protects approximately $14.7 million of prepetition senior secured debt with replacement liens without any showing whatsoever that there would be sufficient collateral to support those liens.
Put simply, the Term DIP Proposal is entirely illusory.
Continuing as to the Debtors' assertion that Wells Fargo's prepetition ABL claims are to be repaid in full, the DIP objection continues: "The Debtors would have this Court believe that the DIP Facility is being used to refinance the Pre-Petition ABL Obligations. Upon that premise, the Debtors seek authority to allow the DIP Lenders to prime the ABL Priority Collateral…and do so without providing the Prepetition ABL Lenders any demonstrated Adequate Protection. But what the Term DIP Proposal actually proposes is to pick and choose those components of the Prepetition ABL Lenders’ Claim the DIP Lenders either are willing to pay or have adequate funding to pay. For those portions of the claim that the Term DIP Proposal leaves behind—portions of the principal of the Prepetition ABL Lenders’
Claim constituting capitalized fees, Pre-Petition Contingent LC Obligations…and the Prepetition ABL Lenders’ indemnity obligations—such amounts either are extinguished or subject to substantial risk of non-payment. This is not a refinancing of the Prepetition ABL Obligations."
From the Store Closing objection:
"On or about January 19, 2023, the Debtors entered into that certain Consulting Agreement (the 'Consulting Agreement'), by and between the Debtors and Gordon Brothers Retail Partners, LLC ('GBRP'). Pursuant to the Consulting Agreement, prior to the Petition Date, GBRP commenced an orderly liquidation of the Debtors’ inventory at all of the Debtors’ store locations and, upon a bankruptcy filing, was to conduct 'going-out-of-business' themed sales at all of the Debtors’ store locations. The Debtors have since unilaterally asserted that the Consulting Agreement is terminated, advised their employees to stop working alongside GBRP and filed an Emergency Motion to Reject the Consultant Agreement with Gordon Brothers Retail Partners, LLC as of the Petition Date…"
On the Debtors' efforts to "circumvent the ABL Agent’s first-priority lien on all inventory…and apply the proceeds of the Sales to obligations secured by liens of junior creditors," Wells Fargo continues:
"As previously stated, the Prepetition ABL Lenders have a first-priority lien on all of the Debtors’ inventory. The Prepetition ABL Lenders’ lien on all inventory that is sold will automatically attach, with the same priority, to the proceeds of the sales of such inventory….Yet the Store Closing Motion makes no mention of how, or when, the proceeds of the Sales will be distributed to the Prepetition ABL Lenders. As more fully stated in the DIP Objection, the Debtors are attempting to 'prime' the ABL Agent’s lien on inventory by avoiding the payment in full of all obligations due and owing under the Prepetition ABL Credit Agreement. Debtors seek this Court’s relief to forego applying the proceeds from the Sales to the payment of obligations that are due and owing to the Prepetition ABL Lender pursuant to the express terms of the Prepetition ABL Credit Agreement and that are secured by the ABL Agent’s first-priority lien on such proceeds. And the Debtors seek this relief without providing any adequate protection to the Prepetition ABL Lenders….Instead, the Debtors are, in bad faith, attempting to circumvent the ABL Agent’s first-priority lien on all inventory and the proceeds thereof, to sell inventory subject to the ABL Agent’s first-priority liens without the ABL Agent’s consent, and to apply the proceeds of the Sales to obligations secured by liens of junior creditors prior to applying such proceeds to outstanding obligations due and owing under the Prepetition ABL Credit Agreement….The Debtors are therefore unable to show that the Sales and Store Closings are being conducted in good faith or meet the 'business judgment' standard."
On pursuing a large store closing/liquidation process without (an already engaged) professional liquidator, Wells Fargo adds: "In major retail liquidations, whether they are “partial-chain” liquidations or “full-chain” liquidations, employment of a professional liquidation consultant is widely understood, and is intended, to maximize value for a debtor’s estate. Indeed, in the Debtors’ own previous bankruptcy case, the Debtors retained a liquidation consultant for a partial-chain liquidation….The Debtors’ proposed large-scale, partial-chain liquidation, involving more than 200 store locations, is a massive enterprise where the particular expertise of a professional liquidator of nationally recognized standing is vital to maximizing the return to the Debtors, their creditors and the estate. The Debtors do not present anyone on their management team who has experience and expertise in retail liquidations—let alone a nationwide liquidation involving more than 200 store locations. And yet, the Debtors maintain they are independently capable of completing the Sales and Store Closings without the expertise of a professional liquidation consultant. Wells Fargo disagrees that the Debtors are capable of this task, and respectfully urges the Court to require retention of a professional liquidator. While the Debtors may select any nationally reputable liquidator acceptable to the Court, as they were permitted to do prepetition and under the terms of the propose ABL DIP Agreement, it is imperative to protect the interests of all creditors that the Sales be professionally managed….The decision to self-liquidate is likely to result in Sales proceeds that do not 'constitute reasonably equivalent value and fair market value' for the subject inventory.…Accordingly, the Debtors have not satisfied the 'business judgment standard."
From the Cash Management objection:
"Wells Fargo faces significant potential liability related to the Debtors' continued use of the Wells Fargo Accounts. Prior to the Petition Date, Wells Fargo was protected from such liability by (i) its rights in the Wells Fargo Accounts and the cash management system in place at the time that concentrated the Debtors’ cash in those accounts, and (ii) liens on substantially all of the Debtors' assets that secured the Debtors’ cash management obligations. Under the Debtors’ proposed DIP financing and the Motion, the Debtors seek to strip Wells Fargo of these protections. Thus, Wells Fargo will either require adequate protection for its ongoing exposure related to the Wells Fargo Accounts or it will close the Wells Fargo Accounts, as it is entitled to do under the Wells Fargo Account Agreements."
On February 14, 2023, Tuesday Morning Corporation and six affiliated Debtors (“Tuesday Morning” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn.
In a press release announcing the filing, Tuesday Morning notes that: "it is pursuing a financial and operational reorganization to enable the Company to reduce its outstanding liabilities, obtain significant and necessary capital, and ultimately transform into a nimbler retailer that serves heritage markets in a profitable manner….The Company has also obtained a commitment from Invictus to provide $51.5 million of debtor-in-possession ('DIP') financing to support ongoing operations during the proceedings. The DIP financing is subject to approval of the Bankruptcy Court.
During the restructuring process, Tuesday Morning plans to focus on optimizing its store footprint and focusing on its core and heritage markets. The Company intends to close stores in low-traffic regions while allocating the proper resources to remaining stores in high-traffic regions. The Company believes this targeted approach to winding down unprofitable and underperforming stores will position Tuesday Morning to emerge from bankruptcy with a profitable, cash-generating store fleet that serves its most engaged and loyal customers."
On February 14th, the Debtors filed each of a DIP financing motion and a store closing motion (which we cover separately).
With the DIP financing motion, the Debtors requested Court authority to: (i) access $51.5mn of new money, debtor-in-possession (“DIP”) financing (including $25.0mn on interim basis, a portion of which will be used to repay a $3,170,000 bridge loan), with Cantor Fitzgerald Securities serving as administrative agent and Invictus Special Situations Master I, L.P. agreeing to serve as backstop lender, and (ii) to use cash collateral.
The DIP financing comes after what can only be called a mad scramble in the hours leading up to the Chapter 11 filings (the Debtors prefer: "After extensive negotiations, the Debtors finalized the terms of the final documentation of the DIP Facility in the hours immediately preceding the filing of the Chapter 11 Cases") with an offer on the table from prepetition ABL lenders scrapped in favor of the current Cantor Fitzgerald/Invictus proposal.
The financing on offer from the prepetition ABL lenders would have required the Debtors to convert to Chapter 7 within 60 days. It also required the Debtors to engage Gordon Brothers as a liquidation consultant in respect of all 487 of their stores, with the Debtors providing as to the ABL lenders' whip hand: "By force, such store closing sales commenced at various store locations prior to the Petition Date, beginning on January 19, 2023." As it stands, the Debtors will pursue a partial liquidation (264 underperforming "Closing Stores") without the added expense of an outside liquidation consultant. More globally, the current arrangements, which provide "for the repayment of the Pre-Petition ABL Obligations," will provide the Debtors with the breathing room necessary "to pursue either a bankruptcy sale process or to reorganize under chapter 11."
The store closing motion [Docket No. 15] seeks Court authority to close 264 underperforming stores (the "Closing Stores") [Docket No. 15, with a list of the Closing Stores beginning on p.33, we also attach an Excel spreadsheet]. Somewhat unusually, the motion did not include a request to appoint a consultant in respect of a store liquidation process that the Debtors hope to complete in 8 weeks. The motion notes that the Debtors are "capable of continuing and completing the Sales and Store Closings without the assistance, and without the significant expense, of a liquidation consultant." Gordon Brothers had been slated to fill that role, as required by proposed debtor-in-possession ("DIP") financing offered by prepetition lenders, but "since the Debtors found alternative, more favorable DIP financing, the Debtors have filed a motion seeking to reject such agreement as an exercise of their sound business judgment."
From the Baldenelli Declaration
"In May 2022, Tuesday Morning entered into the Pre-Petition ABL Credit Agreement with the ABL Lenders….In mid-2022, Tuesday Morning hired an investment banker, Piper Sandler to conduct a search for a new equity investment in Tuesday Morning….In the second half of 2022, Tuesday Morning experienced significant financial difficulties and management departures….In the summer of 2022, Tuesday Morning encountered serious liquidity issues….On September 20, 2022, Tuesday Morning entered into a series of transactions pursuant to which it received a total of approximately $35 million in new capital, including through investments by individuals who were at time in senior management positions (and in some cases still are) at Tuesday Morning….Despite the infusion of additional capital, Tuesday Morning continued to struggle and suffered from a lack of liquidity….On November 4, 2022, Tuesday Morning announced that the employment of each of its Chief Executive Officer, Chief Operating Officer, and Interim Chief Financial Officer would immediately terminate….In November 2022, Tuesday Morning missed an extended deadline to file its 10-Q with the SEC. On November 17, 2022, Tuesday Morning reported in an SEC filing that “the Company determined a material weakness exists in its internal control over financial reporting… Specifically, the Company has concluded that it did not maintain a sufficient complement of personnel with appropriate accounting knowledge, experience and training to oversee the application of certain manual process controls or to maintain adequate segregation of duties….On December 23, 2022, Tuesday Morning de-listed itself from the Nasdaq stock market….On January 5, 2023, Tuesday Morning announced the resignation of its Principal Accounting Officer….On January 29, 2023, Tuesday Morning announced the resignation of a member of its Board of Directors, which board member represented the largest investor in the September 2022 convertible debt investment….On January 9, 2023, Wells Fargo sent a 'Notice of Default And Reservation Of Rights” (a true and correct copy of which is attached as Exhibit B) to Tuesday Morning, which specified certain events of default under the Pre-Petition ABL Credit Agreement, including as a result of Tuesday Morning conducting a significant number of unauthorized, non-ordinary course store closing sales….In January 2023, Tuesday Morning replaced its financial advisor, retaining BDO Consulting Group, LLC ('BDO') to serve as its new restructuring and financial advisor….On January 26, 2023, after other strategic initiatives had faltered, Tuesday Morning announced a plan to close all of its stores, with the assistance of the Liquidation Consultant, and to undertake an orderly liquidation of Tuesday Morning’s business….In early February 2023, the ABL Lenders and Tuesday Morning agreed in principle to a debtor-in-possession credit facility…On February 8, 2023, at the direction of the Special Committee, Tuesday Morning abruptly and surprisingly reversed its decision to file for bankruptcy using debtor-in-possession financing from the ABL Lenders….On February 10, 2023, Tuesday Morning fired its restructuring and financial advisor, BDO. I am not aware whether Tuesday Morning has hired any replacement financial adviser….On February 10, 2023, Haynes & Boones resigned from serving as Tuesday Morning’s counsel….In my experience, it is exceptionally unusual for a debtor’s key advisors to all resign or to be fired in the days before a bankruptcy filing….On February 12, 2023, we learned that Tuesday Morning had terminated the involvement of the Liquidation Consultant in connection with the store closing sales and that Tuesday Morning intended to conduct store closing sales on its own, without the assistance of professional liquidator and in further breach of the Pre-Petition ABL Credit Agreement….In my experience, it is highly unusual and detrimental for a retail company to conduct large-scale store closing sales without the assistance of a professional liquidator. Tuesday Morning itself used a professional liquidation consultant to close its stores during its 2020 bankruptcy proceeding."
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