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Tuesday Morning Corporation – Names Hilco Merchant Resources as Successful Bidder in “Sale” of Remaining Stores; Hilco, However, Apparently Not Intending to Assume ANY Contracts; Hearing Set for April 27th

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April 20, 2023 – Further to a March 20th bidding procedures order (as amended) and an auction held on April 19th-20th, the Debtors notified the Court that they had selected Hilco Merchant Resources, LLC ("Hilco") as the successful bidder in respect sale of “certain of the Debtors’ assets related to the Debtors’ remaining stores*” (the “Sale” and the “Assets, respectively”) [Docket No. 912]. The Debtors did not name a "back-up bidder," and given that the bidding procedures order required them to name any back-up bidder chosen by April 20th, the inference is that there was none chosen.          

  *The Debtors are already liquidating 264 of their 464 retail locations, with the balance constituting the staores that were nominally up for sale further to the bidding procedures order.

On April 18th [Docket No. 886], the Court amended its March 20th bidding procedures order to extend several deadlines related to the Debtors' decsion to delay the auction from April 11th until April 19th. In addition to setting the April 20th deadline for naming the successful and back-up (if any) bidders, the order set the 20th as the deadline by which the Debtors (and any successful bidder) had to "file with the Court and serve on the Contract Counterparties…a further notice…stating which Contracts may be assumed and assigned to the Successful Bidder." 

As to the contracts that Hilco intends to assume, the notice designating Hilco as the successful bidder provides: "the Successful Bidder has indicated that it does not presently intend to take assumption and assignment of any Contracts at the Sale Hearing…."

So…a successful bidder that has no intention to assume any contracts and is otherwise a leading liquidation specialist. Are we now back where everyone except the Debtors and their now exited initial DIP financing providers Invictus (defined below) thought the debtors should be when they filed for bankruptcy (a "22") on February 14th?

In what is likely to prove a related development, the Debtors have agreed a stipulation with their creditors' committee (the "Committee') which extends the Committee's right to object to the sale from April 21st until April 24th.

Sale Background

Bidding Procedure Motion

The Debtors' requesting motion [Docket No. 271, which predates the switch in DIP lenders and the volte face as to the Debtors' view of Gordon Brothers, see "Case Evolution" below] states, “Following the Debtors’ entry into the Prepetition ABL Credit Facility in May 2022, the Debtors engaged Piper Sandler to initiate a strategic process to solicit financing to fully fund the Debtors’ business plan, which was focused on improving the functionality of the Debtors’ Distribution Center and reducing logistics costs. Piper Sandler began such outreach efforts in June 2022 and contacted a range of potentially interested parties. Throughout the summer of 2022, the Debtors, in consultation with Piper Sandler, received and negotiated proposals from various parties. Such efforts eventually culminated in the Note Purchase Agreement in September 2022. The Note Purchase Agreement resulted in $35 million in convertible debt financing, as described more fully in the First Day Declarations.

During the weeks preceding the Petition Date, the Debtors were being pressured to completely liquidate inventory and cease operations at all store locations. The Debtors received a proposal for debtor-in-possession financing permitting the Debtors to continue as a going concern and pursue a sale or reorganization in bankruptcy and thereby enable approximately 200 store locations to remain open rather than a full-chain liquidation.

The Debtors seek authority to sell the Assets through an Auction and related sale process, subject to the Debtors’ right to seek an alternative course of action to maximize the value of their estates. The Debtors and their advisors have conducted pre-petition and will continue to conduct post-petition an extensive marketing process."

Marketing Processes

In a declaration in support of the motion [Docket No. 272], the Debtors' investment banker Piper Sandler states, “As discussed in more detail below, Piper Sandler initiated marketing the business pre-petition and believes the additional timetable post-petition can elicit added interest. Prior to the Petition Date, on January 5, 2023, the Debtors selected Piper Sandler as their investment banker to assist the Debtors in their sale process, most notably to vigorously market the Debtors’ assets and thoroughly solicit and accommodate potential purchasers. Specifically, during the pre-petition period, Piper Sandler engaged with approximately 20 parties to gauge interest in a financing, investment and/or purchase of the business. This outreach included some parties who contacted Piper Sandler on an unsolicited basis.

As part of its marketing efforts, Piper Sandler: 

  1. Contacted 21 parties 
  2. Entered into non-disclosure agreements with 11 parties 
  3. Granted access to the data room to 11 parties 
  4. Received 2 indications of interest.”

Case Evolution

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 23rd, following a continued first day hearing, the Court hearing the Tuesday Morning Corporation cases issued an interim order (i) approving a proposed procedures for store closing sale and (ii) adopting proposed sale guidelines [Docket No. 250].

On March 2, in what was a third shift in proposed debtor-in-possession ("DIP") financing arrangements in under three weeks, the clearly rudderless* Debtors sought Court authority to ditch already 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 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 after that comment was made clearly everything 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, noted that their about face related 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 cited 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? 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.

What Invictus was not prepared to do, however, was exit without being paid in full, something the Debtors have declined to do date…even after having received funding under the new DIP from 1903P. As such, Invictus is pursuing a number of avenues to preclude the Debtors from proceeding further with their new DIP lenders, including through an appeal of the bankruptcy's interim DIP order relating to the replacement DIP financing and an emergency motion to delay a scheduled March 21st hearing to consider the issuance of a final DIP order. Invictus provides [Docket No. 538]: "Because of the bankruptcy court’s order, Invictus is trapped. Invictus’s money went to the Debtors. But the Debtors have not returned that money upon receiving new DIP financing, as the agreement provided. And Invictus does not have the senior liens and protections against new financing it bargained for. The Debtors have simply kept Invictus’s money, while giving a new DIP lender, 1903, all the priorities Invictus was supposed to enjoy. Allowing that sort of maneuver threatens the stability of the DIP financing market. Potential postpetition DIP lenders will have little incentive to provide financing, or will demand huge risk premiums, if debtors can simply keep their money while denying them the protections they bargained for. If DIP lenders cannot trust that debtors will honor their bargains, they will have to either charge huge increases to account for that risk or refuse to lend at all."

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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The post Tuesday Morning Corporation – Names Hilco Merchant Resources as Successful Bidder in “Sale” of Remaining Stores; Hilco, However, Apparently Not Intending to Assume ANY Contracts; Hearing Set for April 27th appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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