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September 17, 2018 – In a 14-minute hearing, parties to the highly contentious Claire’s Stores, Inc. (“the Company”) bankruptcy confirmed that they had reached a settlement pursuant to which junior bondholder Oaktree Capital Management LP (“Oaktree”) will vote in favor of the Plan proposed by the Company and supported by Claire’s senior lenders, led by Elliott Capital Management (“Elliott”) and Apollo Management Holdings LP (“Apollo”), Claire’s’ private equity sponsor. Apollo is the holder of almost 98% of Claire’s outstanding equity and $52.8 million of debt which ranks senior to the $159 million of Claire’s second lien debt currently held by Oaktree. Oaktree, which has spent months vigorously arguing that it was being squeezed out by an unholy alliance of the Company, Oaktree and Elliott, had taken numerous steps to block the Company’s Plan and was widely reported to have been ready to make its own $1.5 billion bid for the Company. Oaktree’s aggressive efforts, led by White & Case’s Tom Lauria, seem to have borne fruit as it has seen its projected recovery increase from about 1% to 14% in recent weeks. Yesterday’s settlement will now see that recovery rise further to at least 18%.
Exact terms are to be finalized when the parties reconvene on September 18, 2018, but there appears to be a consensus around the following terms as presented by counsel to the Company Ray Schrock of Weil Gotshal: Holders of second lien debt will receive a cash recovery of 18%. They will also be entitled to their pro rata distribution of a cash pool to be determined based on the Company’s ability to hit certain business plan EBITDA targets in 2019 and 2020. In 2019, $4.1 million will be available to second lien holders if the Company reaches an EBITDA target of $280.1 million and a further $4.1 million payment is to be shared if $307.7 million of EBITDA is obtained. In 2020, there are again two $4.1 million distributions to be had, these at EBITDA targets of $309.0 million and $339.5 million, respectively. The result is that, if all four targets are reached, second lien debt holders could see a total recovery of @25%. Oaktree, which has argued that the Company has been understating its performance potential, will almost certainly feel bullish on these targets. As part of the settlement, the parties have also agreed to mutual releases, which will see Oaktree drop claims against the Company and Apollo that included the alleged fraudulent transfer of intellectual property. Weil Gotshal’s Schrock commented, in what seemed to be a shared sentiment in the courtroom, “to say that it has been very difficult to get to this point, would be the understatement of the year.”
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