November 13, 2020 – The Debtors filed (i) a memorandum of law in support of Plan confirmation (the "Memorandum") [Docket No. 1136] and (ii) plan voting results showing that the Plan was overwhelmingly accepted by voting creditors [Docket No. 1135]. 

The Debtors' Plan confirmation hearing, initially scheduled for November 5, 2020, has been adjourned to November 23, 2020 [Docket No. 1139].

Plan Overview

The Memorandum provides the following pre-confirmation hearing overview: "The Debtors stand poised to achieve a remarkable result — confirmation of a chapter 11 plan of reorganization that will deleverage their balance sheet by approximately $1 billion, preserve the business as a going-concern, save thousands of jobs and position the Debtors to meet their long-term strategic goals, thereby enabling the Debtors to continue their focus on generating profitable growth and driving value for customers and stakeholders alike. Both prior to and throughout the chapter 11 cases, the Debtors engaged in good-faith, hard-fought negotiations with their key constituents on the terms of this restructuring. The Plan is a culmination of those robust discussions and has been accepted by substantially all Classes, including by holders of approximately 97.25% of the Debtors’ outstanding Term Loan Claims. The overwhelming support for the value-maximizing transactions embodied in the Plan has provided the Debtors with a clear and viable path to exit from chapter 11 and achieve long-term financial success.

The Plan incorporates the terms of a global settlement among every major creditor constituency in the case, receiving support from the ABL Lenders, the Term Loan Lenders and the Creditors’ Committee. In light of the extremely difficult circumstances caused by the COVID-19 pandemic, the Debtors were forced to file for chapter 11 to realize the benefits of their Strategic Plan, which contemplated a substantial rationalization of the Debtors’ brand and store fleet portfolio, a realignment of distribution capabilities and implementation of various other cost saving measures.

The terms of the Debtors’ restructuring are embodied in the Restructuring Support Agreement (the ‘RSA’), dated as of July 23, 2020 and amended as of September 9, 2020, which contemplates a series of restructuring transactions – ultimately embodied in the Plan – that will (if consummated) equitize over $1 billion of the Debtors’ outstanding Term Loans, repay DIP, administrative, and priority claims in full, provide for a pro rata share of certain cash and specified litigation proceeds to the Debtors’ general unsecured creditor constituency and provide two committed exit facilities necessary to execute the Debtors’ go-forward business plan. At the time of execution, the RSA had the support of certain Term Loan Lenders holding approximately 68% of the outstanding principal amount under the Term Loan Agreement and, following an amendment and a number of additional Term Loan Lenders signing joinder agreements to become Consenting Stakeholders, support for the RSA grew to approximately 94.62% of the outstanding Term Loan Claims.

Additionally, on September 8, 2020, the Debtors agreed to a Global Settlement with the Creditors’ Committee, the Consenting Stakeholders and the DIP Lenders, the terms of which include the support of the Creditors’ Committee in favor of the Plan. All of the ABL Lenders have also agreed to vote in favor of the Plan and support the Debtors’ emergence by committing to fund an asset-based lending revolving exit facility. Largely as a result of the substantial support secured through the Debtors’ extensive efforts to build consensus, the Debtors are set to achieve confirmation of the Plan less than four months after the Petition Date.

Importantly, though, notwithstanding the efficient chapter 11 process, the Debtors have ensured that all stakeholders received the due process and transparency critical to the chapter 11 process. The Debtors’ robust noticing program provided every known stakeholder – including parties not entitled to vote on the Plan – with notice of (a) the commencement of these chapter 11 cases on the Petition Date, (b) the Debtors’ request for a hearing to consider approval of the Disclosure Statement and (c) the Debtors’ request for a hearing to consider confirmation of the Plan. The notices also included information regarding other key dates and process information, methods by which parties could request copies of the Plan, Disclosure Statement, and RSA, and key terms of the Plan, including the full text of the release provisions set forth in the Plan and the manner in which parties could elect to opt-out of the Third Party Release. The Debtors provided full notice to all affected stakeholders without shortening any of the Bankruptcy Code’s noticing requirements. The Debtors additionally provided specialized ‘plain English’ notices and opt out forms to current and certain former equity holders.

Unsurprisingly, given the overwhelming support of the Plan, the Debtors received only a handful of formal objections to confirmation, unrelated to cure and assumption objections, which the Debtors will address in their reply brief filed prior to the Confirmation Hearing. The Debtors have consensually resolved a substantial number of the cure objections and hope and expect to resolve the others in the near term… the Debtors’ respectfully submit that the Court should overrule any objections not consensually resolved prior to the Confirmation Hearing (more on outstanding objections below).”

The amended Disclosure Statement [Docket No. 565] provides, “Amidst the challenges facing many in the retail industry, the Debtors commenced these Chapter 11 Cases with a comprehensive pre-negotiated restructuring in hand, together with key creditor support. After several months of diligence and arms’ length negotiations with certain secured term loan lenders, the Debtors have reached agreement with Term Loan Lenders holding approximately 68% of the outstanding Term Loan Claims (the “Consenting Stakeholders”) to fund and support an expedited restructuring that will ensure a viable enterprise and maximize stakeholder recoveries. The pre-negotiated restructuring will deleverage the Debtors’ balance sheet by more than $1 billion and provide for an infusion of $150 million in new money. As contemplated in the Restructuring Support Agreement, dated as of July 23, 2020 (a copy of which is attached hereto as Exhibit B-1), the Debtors intend to move swiftly through these cases to preserve the significant value embodied in the Restructuring Support Agreement. On September 9, 2020, the Debtors and the Consenting Stakeholders agreed to amend the Restructuring Support Agreement (a copy of such amendment is attached hereto as Exhibit B-2), and additional Term Loan Lenders signed joinder agreements to become Consenting Stakeholders, increasing the support for the Restructuring Support Agreement to approximately 94.62% of the outstanding Term Loan Claims. Additionally, the Creditors Committee and each of its members now support the restructuring embodied in the Restructuring Support Agreement, on the terms described herein and set forth in the Plan. Thus, every major creditor constituency that has been active in these Chapter 11 Cases now supports the restructuring embodied in, and confirmation of, the Plan.

As of the Petition Date, the Debtors had outstanding funded debt obligations in the aggregate principal amount of approximately $1.6 billion, consisting primarily of approximately (a) $330 million under the ABL Credit Agreement and (b) $1.27 billion outstanding under the Term Loan Credit Agreement.

If the Plan is confirmed, Ascena will shed more than $1 billion of funded debt upon emergence from these Chapter 11 Cases.  Ascena’s pro forma exit capital structure will consist of (a) a $400 million Exit ABL Facility, (b) a $311.8 million First Out Exit Term Loan Facility, (c) a $88.2 million Last Out Exit Term Loan Facility and the New Common Stock.

Specifically, the Plan contemplates the following Restructuring Transactions:

• the ABL Lenders have agreed to provide a $400 million debtor-in-possession financing facility that will convert to a $400 million Exit ABL Facility upon satisfaction of certain conditions and emergence from these chapter 11 cases;
• all Term Loan Lenders will receive the opportunity to participate in the $75 million New Term Loan Financing, which will be funded initially in the form of a debtor-in-possession financing facility;
• the Term Loan Lenders that have agreed to backstop the New Term Loan Financing will fund the remaining $75 million of the New Term Loan Financing on the same economic terms;
• all Term Loan Lenders that participate in the New Term Loan Financing will have $161.8 million of their prepetition Term Loans rolled up into the debtor-in-possession financing, and the aggregate $311.8 million in loans will be converted to a new first-out term loan facility upon emergence from these chapter 11 cases;
• all Term Loan Lenders will also receive their pro rata share of: (a) 55.1% of the equity in Reorganized Ascena; and (b) participation in $88.2 million of new second-out term loans;
• all Consenting Stakeholders will have the opportunity to receive their pro rata share (based on their holdings of loans under the new first-out term loan facility described above) of 44.9% of the equity in Reorganized Ascena upon emergence from these chapter 11 cases;
• holders of general unsecured claims will receive their pro rata share of the GUC Trust Net Assets; and
• Interests in Ascena will be cancelled, released and extinguished without any distribution.”

The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):

• Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and expected recovery is 100%.
• Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $35,000,000 to $45,000,000 and expected recovery is 100%.
• Class 3 (“ABL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and expected recovery is 100%.
• Class 4 (“Term Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1,110,000,000 and expected recovery is 45.6%. Each Holder shall receive its Pro Rata share of (a) participation in the loans arising under the Second Out Exit Term Loan Facility; and (b) 55.1% of the New Common Stock, subject to dilution on account of the Management Incentive Plan and the Equity Premium.
• Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $700,000,000 to $800,000,000 and expected recovery is 1.1% to 1.3%. Each Holder of a General Unsecured Claim shall receive its Pro Rata share of the GUC Trust Net Assets. GUC Trust Net Assets are the GUC Trust Assets minus trustee expenses, with GUC Trust Assets defined as: “(i) cash in the amount of $6,500,000; and (ii) 100% of the first $1 million and 50% of the next $4 million of proceeds (if any) received by Ascena resulting from Target Corp. et al. v. Visa Inc. et al., case no. 1:13-cv-03477, currently pending in the U.S. District Court for the Southern District of New York, net of any costs incurred by Ascena in connection therewith. Any such proceeds in excess of $5 million (and 50% of proceeds between $1 million and $5 million) shall be retained by the Reorganized Debtors.”
• Class 6 (“Intercompany Claims”) is unimpaired/impaired and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 7 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is N/A.
• Class 8 (“Interests in Ascena”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 0%.

Voting Results

On November 13, 2020, the claims agent notified the Court of the Plan voting results [Docket No. 1135], which were as follows:

• Class 4 (“Term Loan Claims”): 250 claim holders, representing $1,141,617,958.71 (or 98.93%) in amount and 97.28% in number, accepted the Plan. 7 claim holders, representing $12,356,318.55 (or 1.07%) in amount and 2.72% in number, rejected the Plan.
• Class 5 (“General Unsecured Claims”): 281 claim holders, representing $82,585,205.93 (or 90.19%) in amount and 87.54% in number, accepted the Plan. 40 claim holders, representing $8,979,520.14 (or 9.81%) in amount and 12.46% in number, rejected the Plan.

Plan Objections

According to the Memorandum, the Debtors believe that they have resolved, or will be able to resolve, all Objections with the exception of an Objection filed by the United States Trustee [Docket No. 746], the Objection by the U.S. Securities and Exchange Commission [Docket No. 849] and the Securities Lead Plaintiffs’ Objection [Docket No. 889]. The document states, "For the reasons that will be set forth in their reply brief that will be filed prior to the Confirmation Hearing, the Debtors respectfully request that the Court overrule the remaining Objections and confirm the Plan."

The U.S. Trustee's Objection acknowledges that some issue's previously raised were resolved, but notes that "The Amended Plan in its current form cannot be confirmed because the assumption of insider benefit programs violates section 1129(a)(1), the proposed third-party releases and exculpation clauses are overly broad and the deemed acceptance voting provision is inappropriate. Confirmation should be denied. Alternatively, the Court should strike the offending provisions from the Plan."

The SEC states in its objection that the Plan should not be confirmed, "because the Plan contains a third-party release, binding upon the Debtors’ public shareholders, that does not meet the standard for approval in this Circuit. Under the Plan, shareholders will receive nothing, their shares will be canceled and they are not allowed to vote. As if that is not bad enough, the Debtors further seek to bind shareholders to a third-party release that would eliminate whatever remaining rights they may have as shareholders against non-debtors. This includes claims arising from egregious conduct, such as fraud, willful misconduct, breach of fiduciary duty and violations of securities laws.

Under Fourth Circuit law, third-party releases must be essential to the reorganization and fair, and thus, releases should be approved cautiously and infrequently. The release in this case falls far short of that standard. The release by shareholders clearly is not essential to the reorganization because the Debtors have implemented a process that allows shareholders to opt out of the release, and the Plan may be confirmed regardless of how many shareholders opt out. Further, the release is not fair because the shareholders are not receiving any meaningful consideration in exchange for the release, and the parties protected by the release are contributing nothing of value that will benefit the shareholder class. Recognizing that the third-party release is neither essential nor fair, the Debtors apparently are seeking to avoid the 'fair and essential' standard entirely, by arguing that the release is 'consensual.' According to the Debtors, any shareholder who fails to timely return an opt-out form is voluntarily electing to be bound to the release. This position, however, is unsupportable because (i) no reasonable shareholder would agree to be bound to a release (that covers all types of conduct, including fraud) in exchange for nothing, and (ii) the prevailing view in this District and elsewhere is that 'consent' requires an affirmative act, not mere silence."

Meanwhile, the Securities Fraud Action Lead Plaintiffs argue in their objection, "Through the Third-Party Release contained in the Amended Plan, the Debtors seek to completely disenfranchise Proposed Class members – who are receiving nothing under the Amended Plan, who are not entitled to vote on the Amended Plan and who, to the extent they received notice at all, may have received only minimal notice. Yet, the Debtors, with the intent to eliminate Proposed Class members’ only source of potential recovery, have engineered the requirement that Proposed Class members affirmatively opt out of the Third-Party Release to avoid being deemed to have 'consented' to the Third-Party Release. Even more offensive is the fact that the Non-Debtor Defendants – two former directors and officers of Ascena who oversaw the Debtors’ downfall – have provided no contribution whatsoever in exchange for a gratuitous Third-Party Release. Neither the Amended Plan nor the Amended Disclosure Statement even attempt to offer any factual or legal justification for such an overreaching and fundamentally improper release, because there is none. On this basis alone, the Amended Plan is fatally flawed and unconfirmable.

In addition, the Amended Plan cannot be confirmed because it does not disclose whether or how the Debtors intend to preserve evidence potentially relevant to the Securities Litigation after the Effective Date of the Amended Plan; and does not disclose whether or how Lead Plaintiffs and the Proposed Class will be able to pursue Class Claims against the Debtors to the extent of available insurance." 

The following documents were attached to the Disclosure Statement [Docket No. 565]:

• Exhibit A: Plan of Reorganization
• Exhibit B-1: Restructuring Support Agreement
• Exhibit B-2: Restructuring Support Agreement Amendment
• Exhibit C: Corporate Structure Chart
• Exhibit D: Disclosure Statement Order
• Exhibit E: Financial Projections
• Exhibit F: Valuation Analysis
• Exhibit G: Liquidation Analysis

Liquidation Analysis (see Exhibit G of Disclosure Statement [Docket No. 565] for notes)

About the Debtors

According to the Debtors: “ascena retail group, Inc. (Nasdaq: ASNA) is a national specialty retailer offering apparel, shoes, and accessories for women under the Premium Fashion segment (Ann Taylor, LOFT, and Lou & Grey), Plus Fashion segment (Lane Bryant, Catherines and Cacique) and for tween girls under the Kids Fashion segment (Justice). ascena retail group, Inc. through its retail brands operates ecommerce websites and approximately 2,800 stores throughout the United States, Canada, and Puerto Rico.”

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