March 2, 2023 – In what is a third shift in proposed debtor-in-possession ("DIP") financing arrangements in under three weeks, the clearly rudderless* Debtors are looking for Court authority to ditch Court-approved DIP financing being provided by Invictus Global Management, LLC ("Invictus") in favor of financing provided by the 1903P Loan Agent (defined below), a Gordon Brothers affiliate** and, as one of the Debtors' prepetition ABL lenders, part of the group that until just before the Debtors' February 13th bankruptcy filings had been the presumptive source of DIP financing [Docket No. 310].
*As we reported earlier, shortly after the Debtors received a $32.0mn supposed lifeline (in the form of convertible debt) from Ayon Capital, LLC (“Ayon”) and Retail Ecommerce Ventures LLC (“REV,” which holds just over 50% of the Debtors' equity and now facing the very real prospect of bankruptcy itself) in September 2022, the Debtors' then management resigned en masse. Then, after newly appointed, presumably REV-controlled management made its sudden DIP shift to Invictus in the hours before their Chapter 11 filings, the Debtors' long-term legal advisors (Haynes and Boone) and financial advisors (BDO USA LLP) terminated their relationships with the Debtors. In one of these cases' more memorable quotes, Danielle Baldinelli of prepetition secured lender Wells Fargo dryly noted in an objection to the "entirely illusory" Invictus DIP financing: "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."
**An 8-K amending the Debtors' May 2022 credit agreement has Gordon Brothers Group ("GBG") Principal and Managing Director Patricia Parent signing on behalf of the FILO B Documentation Agent, ie the New DIP Lender.
The latest iteration of DIP financing (the “New DIP Facility,” as memorialized in a DIP credit agreement filed at Docket No. 358) is to be "comprised of $12.5mn in new DIP funds, which, when combined with cash on hand, will allow the Debtors to: (i) cash collateralize the Prepetition LC Obligations; (ii) pay off all other amounts owed under the Prepetition ABL Credit Agreement [see, "Prepetition Indebtedness" below]; and then (iii) to continue operating their business and pursuing a sale and reorganization process in these Cases."
The New DIP Facility is being provided by the 1903P Loan Agent, LLC or one of its affiliates (the “1903P Loan Agent” or “New DIP Lender”). Here things get (or rather remain) interesting, especially as to the evolving role of Gordon Brothers and whether the Debtors will continue to pursue a going concern sale of roughly half of their stores or revert to a full liquidation, albeit as "augmented" by truckloads of Gordon Brothers merchandise.
In their February 16th motion seeking authority for $51.5mn of new money, DIP financing from Invictus/Cantor Fitzgerald, the Debtors emphatically rejected the ABL Lenders' DIP-enforced path of a total liquidation of the Debtors almost 500 stores (with Gordon Brothers continuing to serve as a liquidation consultant; the Debtors then commenting: "By force, such store closing sales commenced at various store locations prior to the Petition Date, beginning on January 19, 2023") and embraced Invictus as something of a white knight allowing them to (i) dodge the ABL lenders' requirement of a total liquidation (followed within 60 days to conversion to Chapter 7) and (ii) have the breathing room necessary "to pursue either a bankruptcy sale process or to reorganize under chapter 11."
The obvious antipathy between the Debtors and Gordon Brothers did not abate in the ensuing weeks, with the Debtors looking to reject their existing store closing contract with Gordon Brothers on an energency basis (that did not happen then…and almost certainly will not happen now) and informing Judge E. Lee Morris that they were aware that Gordon Brothers planned to dump $67.0mn of "augmented" merchandise at the Debtors' stores…that "trucks could show up" and that it would be "incredibly disruptive to have to address those trucks."
In the ten days since that comment was made clearly everything has changed, but why and at who's behest? The Debtors, apparently the only stakeholder in these cases not to have a visceral antipathy towards all things Invictus, note that their about face relates mostly to Invictus' failure to put itself forward as a stalking horse (Invictus claims to have made unsettling discoveries during diligence, delaying its decision as to a stalking horse role as it brought in further consultants) but also cites a rapprochement of sorts with its prepetition ABL lenders, noting "settlement discussions with the ABL Lenders on a consensual resolution [and] intense and fruitful negotiations."
…and what of Invictus? As discussed below, Invictus prepares resigned to limping off after appearing to be soundly beaten by Gordon Brothers, with a March 3rd motion noting that: "Though surprised by the Debtors’ change of heart, Invictus does not begrudge the Debtors’ their election to proceed with a different DIP provider….As a result, Invictus files this Motion to ensure it gets the benefit of its bargain…" That benefit being repayment of its DIP and bridge loan and fees (3% committment, 7% backstop, 5% exit (this probably not payable) and a $169k DIP agent fee).
Replacement DIP Motion
In the motion requesting the (replacement) replacement DIP financing, the Debtors explain as to their decsion to part ways with Invictus/Cantor Fitzgerald: "After it became clear that the Invictus DIP Lenders’ requirements for continuing with the Invictus DIP Facility no longer represented the best path forward in pursuit of the Debtors’ goal to right-size their enterprise and reorganize in the Cases, in part because Invictus declined reasonable proposals to resolve matters with the Prepetition ABL Lenders and the Debtor, the New DIP Lender approached the Debtors with an alternative financing arrangement.
After intense and fruitful negotiations in an emergency posture, the Debtors and the Prepetition ABL Lenders reached an agreement…for the New DIP Lender (who is also the FILO B Documentation Agent) to provide the New DIP Facility, and for the parties to pay, refinance, or otherwise resolve the Prepetition ABL Obligations, and to cash collateralize the Prepetition LC Obligations.
Specifically, the New DIP Lender will provide up to the $12.5 million in new DIP funds, which, when combined with cash on hand, will allow the Debtors to: (i) cash collateralize the Prepetition LC Obligations; (ii) pay off all other amounts owed under the Prepetition ABL Credit Agreement; and then (iii) to continue operating their business and pursuing a sale and reorganization process in these Cases.
The Debtors urgently need DIP financing in order to continue operations and avoid immediate and irreparable harm. Following a lengthy hearing on February 15, 2023, the Court granted interim approval of a DIP facility (the 'Invictus DIP Facility') spearheaded by Invictus Global Management, LLC ('Invictus”) and Cantor Fitzgerald Securities, as administrative agent, for itself and for and on behalf of other lenders party thereto (collectively, the “Invictus DIP Lenders). Unfortunately, the Invictus DIP Facility was not all that it was held out to be. Critically, Invictus failed to deliver the stalking horse bid it guaranteed the Court and all parties on the record at the first-day hearing that it would make. That promise of a stalking horse bid was fundamental to the Debtors’ favoring of the Invictus DIP Facility over the interim, fee-free use of cash collateral offered by the ABL Lenders at the hearing. Invictus threatened to withdraw its interest in making a stalking horse bid if the Debtors accepted the ABL Lenders’ proposed use of cash collateral. After it failed to make a stalking horse offer, and in the face of settlement discussions with the ABL Lenders on a consensual resolution, it insisted on pursuing a strategy that, through costly, cumbersome litigation, would paralyze and stagnate these Cases and severely threaten the value of the estates and the Debtors’ critical prospects to expeditiously emerge from bankruptcy. Needless to say, discussions with Invictus have broken down beyond repair.
….As a result, the Debtors have negotiated a replacement DIP facility (the 'New DIP Facility') with 1903P Loan Agent, LLC or one of its affiliates ('New DIP Lender'). The New DIP Lender is also the FILO B Documentation Agent and one of the Prepetition ABL Lenders [ie Gordon Brothers]. The New DIP Facility is the result of intensely focused negotiations between the Debtors and the New DIP Lender on an emergency basis given the exigent circumstances. Under these particular circumstances, and for the reasons set forth herein, the New DIP Facility provides the best opportunity to preserve and enhance value and avoid immediate and irreparable harm to the Debtors, their estates and their creditors, as this case progresses….The agreement with the New DIP Lender reflects the most favorable terms under which the Debtors have been able to obtain viable, continued DIP financing since commencing these Cases, which financing will allow the Debtors to explore value-maximizing options in Chapter 11 in an effort to preserve value for their creditors through an expeditious process to sell substantially all of their assets as a going concern. The New DIP Facility is necessary to, and will, fund critical expenses and provide the Debtors with an orderly continuation of the Cases necessary to implement their intended sale process.
So, do Wells Fargo, Gordon Brothers and the other prepeition lenders, once very much intent on a full liquidation of the Debtors, really want to provide the Debtors with financing "to implement their intended sale process"?
Key Terms of Replacement DIP Financing
- Borrower: Tuesday Morning, Inc.
- DIP Lender: 1903P Loan Agent, LLC, or an affiliate thereof (ie Gordon Brothers)
- Guarantors:
- Tuesday Morning Corporation
- TMI Holdings, Inc.
- Friday Morning, LLC
- Days of the Week, Inc.
- Nights of the Week, Inc.
- Tuesday Morning Partners, Ltd
- DIP Facility: DIP ABL Loans in an amount not to exceed $12.5mn
- New Money: $12.5mn
- Roll-up: N/A
- Permitted Use of Proceeds: As adequate protection of the DIP Lenders’ interests in the DIP Collateral and the Prepetition Lenders’ interests in the Prepetition Lenders’ Collateral and for the Lenders’ agreement for the Debtors to use Cash Collateral and as a condition precedent to the DIP Lenders’ agreement to provide the DIP Facility, there shall be established a 13-week cash flow budget (the “Budget”), a summary of which is attached to the Interim Order as Exhibit 2, for the Debtors’ cash receipts and expenses (including professional fees and expenses), which shall provide, among other things, for the payment of interest in respect of the DIP Facility to the DIP Lenders in accordance with the terms of the DIP Documents, and the adequate protection amounts set forth herein. Only so long as a Termination Declaration or reservation of rights shall not have been delivered, the Debtors are authorized to and shall use the Cash Collateral (including the advances under the DIP Facility) strictly in accordance with the Budget and the terms of the Interim Order. The Debtors shall comply with and update the Budget from time to time in accordance with the DIP Documents.
- Maturity/ Expiration Date: The consent of the DIP Agent and DIP Lenders, the Debtors’ authority to use Cash Collateral and the DIP Lenders’ commitment to provide credit under the DIP ABL Credit Agreement and the Interim Order, subject to the funding and Budget limitations above, shall be effective upon entry of the Interim Order to and including the earlier of: (a) the Termination Declaration Date; provided that the Debtors shall be authorized to use Cash Collateral following delivery of a Termination Declaration solely to the extent set forth in the Interim Order; and (b) [TBD], 2023, at 5:00 p.m. Central Time, at which time all of the Debtors’ authority to use Cash Collateral and to obtain credit under the DIP ABL Credit Agreement and the Interim Order shall terminate, as shall the DIP Agent’s and the DIP Lenders’ obligation to continue funding the DIP Facility, unless extended by written agreement of the parties, a copy of which with an updated Budget shall be promptly filed with this Court by the Debtors (the “Expiration Date”).
- Interest Rates: SOFR + 11.00% (SOFR Floor of 2.00%)
- Fees:
- Closing fee: None
- Monitoring fee: None
- Agency fee: None
- Prepayment fee: None
- Milestones:
- Debtors shall designate a Stalking Horse Purchaser and Stalking Horse Asset Purchase Agreement, in form and substance acceptable to DIP Agent; No later than March 21, 2023.
- The Bankruptcy Court shall have entered the Final Order in form and substance acceptable to DIP Agent; No later than March 21, 2023.
- On or before March 21, 2023, the Bankruptcy Court shall have entered one or more orders, each in form and substance acceptable to DIP Agent, approving the Bid Procedures Order and providing, among other things, that qualifying bids shall be due by no later than April 10, 2023.
- Debtors shall send Cure and Possible Assumption and Assignment Notices to All Contract Counterparties and Notice of the Sale; No later than March 24, 2023.
- The Bankruptcy Court shall have entered an Order in form and substance acceptable to DIP Agent, authorizing the sale of all or substantially all of the Debtors’ assets; No later than April [19], 2023.
- The Debtors shall have consummated a sale of all or substantially all of the Debtors’ assets; No later than April [21], 2023.
Invictus Response
In a response in the early hours of March 3rd [Docket No. 368] Invictus makes it clear that it is willing to step aside in favor of new financing…but only if it is properly compensated ("taken out") for in accordance with the Court's February [ ] interim DIP order.
"The Debtors are in clear violation of this Court’s Interim DIP Order and have breached the DIP Term Loan Agreement, a post-petition contract. In the Debtors’ 1903 DIP Motion, Debtors request this Court’s blessing to continue violating and ignoring the Interim DIP Order and DIP Term Loan Agreement without citing to any authority in support of their requests. The Court should not condone the violation of its own order – or of the loan agreement it previously approved. To be clear, Invictus does not oppose the Debtors proceeding with a loan the Debtors view as preferable – but the Debtors must proceed to take out the DIP Loan in accordance with this Court’s Interim Order and the loan agreement into which the Debtors entered. Failure to do so would undermine this Court’s process for approving DIP financing and cast doubt on others’ willingness to lend.
Though surprised by the Debtors’ change of heart, Invictus does not begrudge the Debtors’ their election to proceed with a different DIP provider. Indeed, such a scenario is expressly contemplated in the DIP Term Loan Agreement but the Debtors have chosen to ignore their contractual obligations and instead have taken actions contrary to this Court’s Interim DIP Order and bankruptcy law. As a result, Invictus files this Motion to ensure it gets the benefit of its bargain: (i) repayment in full of both the initial $15 million Interim Term Loan, plus the fees and costs associated therewith in accordance with the terms of both the Interim DIP Order and the DIP Term Loan Agreement and (ii) payment in full of the Bridge Loan that kept the Debtors’ employees from walking away and funded each of the Debtors’ current professionals’ retainers, as contemplated by the Debtors and Invictus and as contained in the DIP Motion and the DIP Credit Agreement. Invictus relied on the Interim DIP Order, which this Court entered, and the DIP Term Loan Agreement, which this Court approved, and the DIP Motion, when agreeing to lend more than $18.2 millions of dollars to the Debtors. Not enforcing the terms of each would be contrary to well settled law and governing provisions of the Bankruptcy Code, not to mention extremely detrimental to the bankruptcy process and all future debtors seeking post-petition DIP financing.
As set forth in the Interim DIP Order approved by this Court, the DIP Lender and DIP Agent are also entitled to the following fees: a commitment fee of 3% of any DIP New Money Loan, a Backstop Fee of 7% of the aggregate commitment, due at closing, 5% Exit Fee, which is only applicable if the DIP Facility is repaid more than 60 days after the closing date, and a DIP Agent Fee of $168,750."
Tensile Joinder to Debtors' Motion to Vacate Interim DIP Order
Prepetition lender Tensile pitched in with a joinder to the Debtors' motion to vacate the interim DIP order [Docket No. 359]: "…the 'Interim Invictus DIP Order' was predicated on representations of counsel to Invictus that a stalking horse bid would be submitted to the Debtors by February 24, 2023…no such stalking horse bid was received despite Invictus’s counsel’s assurances and Invictus’s longstanding and continuous familiarity with the Debtors dating back to at least 2020. Invictus failed to deliver on promises made to the Debtors and this Court, and the Debtors and their creditors should not be forced to bear the costs of this failure. As such, the Court should reconsider its approval of the Interim Invictus DIP Order, and specifically the DIP fees and interest, as well as its good faith findings.
….Invictus conditioned their willingness to provide the stalking horse bid on approval of their DIP, pressuring the Debtors to accept its onerous terms….This posturing, does not exemplify good faith and does not deserve the Court’s findings, even ignoring that it was followed by a failure to provide the stalking horse bid as promised. To the extent the Court does not vacate the Interim Invictus DIP Order or otherwise reconsider the relief granted, Invictus may feel emboldened to extract further value from the estate….Additionally, the Invictus DIP did not provide a net value to the estate. Countless hours and professional fees were incurred over the last month, well in excess of what would have burdened the estate in a consensual process due to: a delayed filing to negotiate the DIP, elongated and highly contested hearings, extensive discovery processes across multiple parties over the past two weeks (many of which were Invictus-led), and now the review of a third DIP Motion in the span of a month. The Invictus DIP proved to be a costly distraction, and without a stalking horse bid, a distraction without any justification."
Prepetition Indebtedness
The Debtors’ funded debt obligations are comprised of Prepetition ABL Secured Indebtedness, Prepetition Term Loan Lenders’ Secured Indebtedness and Prepetition Convertible Note Secured Indebtedness.
- Prepetition ABL Secured Indebtedness. Tuesday Morning, Inc., as lead borrower, and each of the remaining Debtors, as guarantors, Wells Fargo Bank, N.A. as administrative agent and 1903P Loan Agent, LLC, as FILO B documentation agent, are parties to the Prepetition ABL Credit Agreement dated as of May 9, 2022. The Prepetition ABL Credit Agreement provided for a senior secured asset based revolving credit facility in an amount up to $110,000,000, including the issuance of $25,000,000 of letters of credit. As of the Petition Date, the Debtors believe that the approximate aggregate amount owed to the Prepetition ABL Agent and the Prepetition ABL Lenders pursuant to the Prepetition ABL Claim Documents is $998,105.14 in revolving credit loans with the outstanding principal amount of $928,715.14 and accrued interest of approximately $69,390.00; FILO B Obligations in the amount of $7,422,050.00 with the outstanding principal amount of $7,375,000.00 and accrued interest of approximately $47,050.00.
- Prepetition Term Loan Lenders’ Secured Indebtedness. Tuesday Morning, Inc., as lead borrower, and each of the remaining Debtors, as guarantors, Alter Domus (US) LLC, as administrative agent, are parties to that certain Prepetition Term Loan Agreement dated as of December 31, 2020, which provided for a term loan facility in an amount up to $25,000,000. As of the Petition Date, the Debtors believe the Prepetition Term Loan Representative and the Prepetition Term Loan Lenders are owed in an aggregate amount approximately $24,474,459.00 under the Prepetition Term Loan Claim Documents.
- Prepetition Convertible Note Secured Indebtedness. On September 20, 2022, Tuesday Morning Corporation and TASCR Ventures CA, LLC, as FILO C Collateral Agent for the FILO C secured parties executed that certain Note Purchase Agreement. As of the Petition Date, the Debtors believe that they owe the Prepetition Convertible Notes Agent and the Prepetition Convertible Noteholders an approximate aggregate amount equal to $21,183,000.00, consisting of (i) a series of junior secured convertible notes in the outstanding principal amount of $7,742,479 (the “FILO C Notes”); (ii) a series of junior secured convertible notes in the approximate outstanding amount of $10,353,021 (the “JSC Notes”); and (i) a series of junior secured convertible notes in the approximate outstanding amount of $3,087,500 (the “Management JSC Notes”).
DIP Marketing
The motion provides: "The first proposal for DIP financing came from the Prepetition Lenders (the 'ABL Proposal'). The Debtors and their advisors discussed a variety of different structures with the Prepetition Lenders for the ABL Proposal. The most recent ABL Proposal included a superpriority revolving credit facility of up to $40 million, an initial available amount of only $35 million, and a partial roll-up of the Prepetition Secured Indebtedness.
A key, non-negotiable requirement for the ABL Proposal was that the Debtors must file Chapter 11 and immediately commence a 60-day company-wide liquidation, then convert to Chapter 7. As such, the Debtors logically explored alternative financing options. The second proposal for DIP financing was for the DIP Facility proposed in this Motion. The DIP Facility, among other things, provides for the repayment of the Pre-Petition ABL Obligations, and provides the Debtors with an opportunity to pursue either a bankruptcy sale process or to reorganize under chapter 11.
While negotiating the debtor-in-possession financing proposals, the Debtors were faced with significant pressure from the Prepetition ABL Lenders to pursue a path of immediate, company-wide liquidation under the ABL DIP Facility. Specifically, the Prepetition ABL Lenders unilaterally increased the Company’s reserve requirements, required that the Company immediately commence store closing sales, and terminated and accelerated the Prepetition ABL Facility. By force, such store closing sales commenced at various store locations prior to the Petition Date, beginning on January 19, 2023.
Under immense timing pressure stemming from the ongoing store closing sales and the Debtors’ liquidity constraints, the Debtors engaged in simultaneous negotiations regarding the terms and final documentation of the DIP Facility to maximize the value of their estates. 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."
About the Debtors
According to the Debtors: “Tuesday Morning Corporation is one of the original off-price retailers specializing in name-brand, high-quality products for the home, including upscale home textiles, home furnishings, housewares, gourmet food, toys and seasonal décor, at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Based in Dallas, Texas, the Company opened its first store in 1974 and currently operates 487 stores in 40 states."
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