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September 11, 2019 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected [Docket No. 162] to the Debtors’ proposed asset sale bidding procedures as they relate to the Debtors' e-commerce business (the Avenue.com and Loralette.com websites, together the "E-Commerce Business"), arguing that the current truncated timetable will discourage prospective bidders. The Committee also wants to see a few modifications as to the ability of the Debtors' pre-petition subordinated lender (an affiliate of the Debtors' 99% equity holder, Versa Capital Management, LLC) to credit bid its debt. Clearly the Committee is somewhat sceptical about the nature of this "alleged" debt issued as recently as April 2019; innocuous to senior lenders as clearly subordinated, but still able to credit bid…and sitting above debt held by the Committee. In any event, the Committee does not want the pre-petition subordinated lender to have a chance to credit bid until it has fully understood the nature of the debt and had a chance to lodge a challenge.
The objection states, “Given the unusual nature of a sale process through which the Debtors’ e-commerce business is being marketed and sold as standalone going concern while their retail segment is being liquidated, interested parties will likely need more than 4-6 weeks to assess the value of the E-Commerce Business Assets. As the Debtors admit they conducted minimal – if any – prepetition marketing, the Committee submits that a brief extension of the sale process will ensure that all interested parties have a fair opportunity to perform due diligence and submit a bid."
The objection continues, "Under the proposed timeline, prospective bidders will have until (i) September 14 (29 days after the Petition Date) to submit a letter of intent, (ii) September 24 (39 days after the Petition Date) to submit a Stalking Horse Bid, and (iii) October 1 (46 Days after the Petition Date) to submit a general bid for the E-Commerce Business Assets. Given the lack of prepetition marketing, the proposed deadlines do not provide sufficient time for a potential purchaser to meaningfully evaluate the Debtors’ business and submit a bid. While the Committee understands the Debtors’ need to limit operating costs in light of their constrained liquidity, the E-Commerce Business Assets – which are likely the Debtors’ most valuable assets – have minimal carrying costs and do not need to be sold on a fire-sale timeframe. A short extension of the bid deadlines as set forth herein will allow for a more fulsome, value maximizing marketing process for the benefit of all of the Debtors’ creditors, not just the Pre-Petition Secured Lenders."
The Pre-Petition Subordinated Note
The Committee's objection states: "Additionally, the Committee requests the following two modifications to the proposed Bid Procedures. First, the Bid Procedures should be revised to incorporate the same language included in the Interim DIP Order providing that the Pre-Petition Subordinated Lender shall only be entitled to credit bid after the expiration of the challenge period with no claims having been threatened or asserted by the Committee. Second, to the extent the Pre-Petition Subordinated Lender submits a valid bid (including a credit bid) for the E-Commerce Business Assets, it should not also be permitted to be a Consultation Party under the Bid Procedures.”
The Committee's objection continues, "According to the Debtors, on or about April 12, 2019, Debtor Ornatus Holdings issued the Pre-Petition Subordinated Note in favor of Ornatus URG Funding, LLC (the 'Pre-Petition Subordinated Lender'), an affiliate of Versa Capital Management, LLC ('Versa'), which holds, directly and indirectly, over 99% of the Debtors’ equity. The Debtors allege that the Pre-Petition Subordinated Note secures a loan in the principal amount of approximately $38.4 million, plus additional amounts advanced by Versa and certain of its affiliates, and is guaranteed by the other Debtors. The Debtors further allege that (i) the Pre-Petition Subordinated Note is collateralized by a security interest in substantially all of the Debtors’ assets, which is subordinate to the obligations under the Pre-Petition ABL Facility, and (ii) no less than $38.9 million was due under the Pre-Petition Subordinated Note as of the Petition Date."
Pre-Petition Capital Structure
The Debtors’ pre-petition debt structure consists principally of (i) the Pre- Petition ABL Facility; (ii) the Pre-Petition Subordinated Note; and (iii) other unsecured debt consisting of, among other things, employee-related liabilities and trade debt, including amounts owed to landlords in connection with certain leases of nonresidential real property.
- The Pre-Petition ABL Facility. The Debtors are party to an April 2019 revolving credit and security agreement (the “Pre-Petition ABL Credit Agreement”) with PNC Bank, National Association (“PNC”) as lender and agent, which permits borrowings of up to $45.0mn, including a first-in, last-out loan tranche (the “FILO Loan”) of $6.0mn, which can increase by an additional $4.0mn during the period commencing on December 1 of each year and ending on the last day of February of the following year. As at the Petition date, the Debtors owed $15.3mn under the Pre-Petition ABL Facility. On July 22, 2019, PNC issued the Debtors with a notice of default in respect of this facility.
- Pre-Petition Subordinated Note. In April 2019, Debtor Ornatus Holdings issued a Master Subordinated Note (the “Pre-Petition Subordinated Note”) in favor of Ornatus URG Funding, LLC (the “Pre-Petition Subordinated Lender”), an affiliate of the Debtors’ equity holders, which secures a loan in the principal amount of approximately $38,394,840 plus additional amounts advanced by the Pre- Petition Subordinated Lender, the Sponsor [ie Versa Capital Management, LLC], or any of such parties’ affiliates from time to time (the “Pre-Petition Subordinated Note”). The Pre-Petition Subordinated Note is guaranteed by Debtors Avenue, Ornatus GC, and Ornatus RE and is collateralized by a security interest in the Collateral, which, under the terms of the Pre-Petition Subordinated Note, is subordinate to the obligations under the Pre-Petition ABL Facility. As at the Petition Date, $37.8mn was due under the Pre-Petition Subordinated Note.
- Other Unsecured Debt. As at the Petition date, the Debtors’ owed in excess of $25.0mn in respect of unsecured debt, including amounts owed to the Debtors’ landlords for past-due rent.
About the Debtors
Avenue is a national specialty fashion retailer of women’s plus-sized apparel, intimates, footwear, and accessories that is dedicated to providing real-sized women with modern and fashionable clothes at affordable prices. Avenue’s product line almost exclusively features a marketplace sourced and procured assortment of branded merchandise. Headquartered in Rochelle Park, New Jersey, the Debtors have two primary units: the retail store business and an e-commerce business. Through their retail business, the Debtors operate 255 leased stores in 35 states, which are primarily located in suburban areas and in malls or shopping centers. In addition to their retail operations, the Debtors sell and distribute merchandise through the Avenue.com and Loralette.com websites (the “E-Commerce Business”).
For the period from January through May of 2019, the Debtors generated approximately $75.3 million in sales and had negative EBITDA of approximately $886,000. Retail store sales accounted for approximately 64% of the Debtors’ total annual sales, while the Debtors’ E-Commerce Business generated approximately 36% in sales. As of the Petition Date, the Debtors employed, in the aggregate, approximately 2,000 employees; with approximately 790 employees of those on a full-time basis, while the remainder work on a part-time basis.
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