Creative Hairdressers, Inc. – 800 Store Hair Salon Chain Files Chapter 11 Citing Market Saturation and COVID-19; Lender Tacit Salon Holdings, LLC to Serve as Stalking Horse with $36.5mn Credit Bid

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April 23 , 2020 – Creative Hairdressers, Inc. and one affiliated Debtors (“CHI” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Maryland, lead case number 20-14583. The Debtors, one of the nation’s largest independent family owned chain of hair salons, are represented by Joel L. Sher of Shapiro Sher Guinot & Sandler. Further board-authorized engagements include (i) Carl Marks Advisors as financial advisors (ii) A&G Realty Partners as real estate advisor and (iii) Epiq Corporate Restructuring, LLC  as claims agent. 

The Debtors’ lead petition notes between 25,000 and 50,000 creditors; estimated assets between $1.0mn and $10.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) EK McConkey & Co ($685k legal services claim), (ii) Engie Insight Services ($515k utility claim) and (iii) Mid Atlantic Construction ($515k trade debt claim),

For the fiscal year ending September 2019, CHI had approximately $440.0mn in revenues.

In a press release announcing the filing, the Debtors also "announced an agreement to sell its assets to HC Salon Holdings, Inc., an affiliate of Tacit Salon Holdings, LLC, along with a plan designed to significantly reduce its debt obligations and establish a sound financial platform for long-term growth. The company plans to re-open its salons when local and state authorities determine it is safe for employees and customers to return in wake of the COVID-19 crisis."

Goal of the Chapter 11 Filings

The Debtors state: "The  Debtors commenced these Chapter 11 Cases with the goal of attempting to effectuate an expeditious sale of their business, as a going concern, to, among other things, save as many jobs of its furloughed employees as possible and preserve the going concern value of the Debtors.

Sale to HC Salon and APA

Prior to the Petition date, the Debtors entered into an Asset Purchase Agreement (the “APA,” filed as Exhibit 1A of Docket No. 22) with HC Salon pursuant to which HC Salon has agreed to purchase substantially all of the assets of CHI and serve as a stalking horse in a section 363 auction process. The purchase price offered by HC Salon is comprised of a credit bid in an amount up to 90% of what is owed under DIP financing provided by HC Salon (ie 90% of $40.7mn), assumed liabilities and an amount in cash equal to the amount set forth in the Wind Down Budget.

The Debtors have not provided detail as to when HC Salon acquired the debt from the Debtors' original lenders (and how much it paid) but presumably as "a holding company formed to acquire salon platforms," it bought that debt at a discount. Bid Protections include a $300k expense reimbursement (as per APA, in the motion this is noted as $200k) and a $250k minimum initial overbid amount.

The APA provides the following as to purchase price: "The consideration for the Acquired Assets (the 'Total Consideration') shall be (i) the Assumed Liabilities, (ii) the credit bid in an amount equal to 90% of the Obligations (as defined in the DIP Financing Agreement) (the 'Credit Bid') (as an offset against, and reduction in the amount of Sellers’ debt in respect of such Obligations under the DIP Financing Agreement, pursuant to Section 363(k) of the Bankruptcy Code), and (iii) the amount, paid in cash, equal to the amount set forth in the Wind Down Budget (such amount, together with the amount of the Senior DIP NM Term Loan Obligations and the Credit Bid, the 'Purchase Price')."

Prepetition Debt

CHI is indebted to HC Salon Holdings, Inc. (“HC Salon”) as successor-in-interest to a bank group comprised of M&T Bank, Eagle Bank and Burke and Herbert Bank The loan facility (the “Prepetition Secured Loan”) is secured by a blanket lien on all of CHI’s assets (and guaranteed by Ratner Co) securing a line of credit in the current approximate amount of $36.4mn, plus a Letter of Credit facility in the approximate amount of $4.1mn.

Events Leading to the Chapter 11 Filing

In documents filed with the Court [see Docket No. 23] the Debtors detailed the events leading to CHI’s Chapter 11 filing, citing a market that has become increasingly competitive and saturated in recent years following aggressive expansion and then the fatal blow of COVID-19:

"Prior to the Petition Date, the Company was forced to suspend its operations due to directives issued by various state and local authorities that all non-essential businesses be closed due to the coronavirus disease 2019 (‘COVID-19’) pandemic sweeping the nation. The Company commenced these Chapter 11 Cases with the goal of attempting to effectuate an expeditious sale of their business, as a going concern, to save as many jobs of its furloughed employees as possible.

As set forth below and in the First Day Declaration, the Company and its advisors engaged in a robust marketing process with the goal of finding a buyer outside of chapter 11, however, this process ultimately was unsuccessful. Additionally, the Company sought unsuccessfully alternative financing on a secured and unsecured basis. 

In recent years, CHI has been subject to the impact of large competitors who embarked on aggressive expansions of their operations with the resultant market saturation eroding CHI’s profitability. In order to address these market forces over the last several years, CHI’s management and ownership implemented a number of strategic initiatives to enhance profitability, including closing underperforming stores, focusing on hair coloring and implementing a multiphased salon professional commission structure."

About the Debtors

CHI was founded in 1974 by Dennis Ratner and Ann Ratner. CHI operated under the Hair Cuttery, Bubbles and Cielo brands. CHI is incorporated under the laws of the Commonwealth of Virginia. CHI has become one of the nation’s largest independent family owned chain of hair salons, providing comprehensive services for both female and male guests. It presently owns and operates approximately 800 hair salon locations, including approximately 100 locations in the State of Maryland. Prior to being forced to suspend its operations as a result of the Covid-19 crisis, CHI employed over 10,000 full and part time employees.

About Tacit Salon Holdings, LLC

Tacit Salon Holdings, LLC (“TSH”), a socially responsible investment platform committed to sustainability, gender equality and diversity inclusion, is a holding company formed to acquire salon platforms in the $47 billion hair care industry in the United States. TSH provides capital and infrastructure and teams up with industry leaders to acquire, reposition, and grow hair care assets in a socially responsible way. 

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