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May 6, 2020 – The Debtors requested Court authority to (i) access $20.5mn debtor-in-possession (“DIP”) financing, including $10.25mn on an interim basis, from Lion/Hendrix Cayman Limited, the prepetition holder of four notes (the “DIP Lender” and also the Debtors' credit bidding stalking horse in a section 363 auction/sale process) and (ii) use cash collateral [Docket No. 20]. The $10.25mn balance of the DIP facility would be made available upon the issuance of a final DIP order.
The $20.5mn of DIP financing is comprised of $6.83mn in new money and a $13.66mn roll-up of one of the prepetition notes (Tranche Note B). The requested interim DIP financing is to be split evenly between new money and roll-up, ie $5.125mn of each. With a final DIP order, the Debtors will have a greenlight access a further $1.705mn of new money and to roll-up $8.55mn. Notwithstanding the roll-up, the lenders under the Debtors' April 2019 $20.0mn senior credit facility ($19.45mn outstanding as at Petition Date) will maintain their relative superiority vis-a-vis rolled-up notes.
Please see the structure chart below for a better understanding of how this is going to work. Not featured on the chart is the ultimate parent of the DIP lender, private equity house Lion Capital which is also the Debtors' principal shareholder, having acquired is majority equity stake (John Varvatos keeping a position) in 2012. This bankruptcy is a largely family affair with the prepetition noteholder-turned-DIP Lender set to credit bid a portion ($76.0mn) of the $94.8mn it is owed in respect of five notes to purchase the very same Debtors that are presently owned by the DIP Lender's own parent.
The DIP motion states, “The Debtors seek post-petition use of Cash Collateral from the Prepetition Credit Agreement Secured Parties and Prepetition Noteholder, and access to post-petition financing on a super-priority basis from the DIP Lender. In the ordinary course of business, the Debtors require cash on hand and cash flow from their operations to fund their liquidity needs and operate their businesses. In addition, the Debtors require access to sufficient liquidity to fund these chapter 11 cases while working towards a successful sale transaction. Particularly in light of the current COVID-19 pandemic, and as described in greater detail in the First Day Declaration, post-petition financing is necessary in order for the Debtors to have access to sufficient liquidity to maintain ongoing day-to-day operations, ensure proper servicing of customers post-petition and fund working capital needs. The DIP Financing also serves a larger purpose for the Debtors. The additional standby liquidity made available under the DIP Financing signals to the Debtors’ vendors, suppliers, customers and employees that the Debtors will continue to meet their commitments during these chapter 11 cases.
If the Debtors are unable to gain access to the DIP Financing, the proposed path to a successful going concern sale of the Debtors’ assets would be blocked and the Debtors’ value as a whole would be materially and irreparably harmed. Absent the liquidity provided by the DIP Financing and use of Cash Collateral, the Debtors would, among other things, be unable to pay vendors and suppliers resulting in a cessation of their business operations. The relief requested by this Motion is a necessary step to both preserving the Debtors’ operations as well as a bridge to a sale transaction that maximizes value for the Debtors’ estates and all of their stakeholders.”
Key Terms of DIP Financing
- Borrowers: John Varvatos Enterprises, Inc. and John Varvatos Apparel Corp.
- Guarantor: Lion/Hendrix Corporation
- Lenders: The DIP Lenders, as provided and described in the DIP Credit Agreement
- Administrative Agent: Lion/Hendrix Cayman Limited
- DIP Facility Amount: The DIP Facility consists of a term loan in a principal amount of up to $20,500,000, including a single draw (or as otherwise agreed by the DIP Secured Parties) on the date of execution of the DIP Credit Agreement in an aggregate principal amount of up to $10.25 million upon entry of the Interim Order.
- Roll-up: On the Closing Date, $5,125,000.00 of the Prepetition Notes Obligations arising from the Tranche B Prepetition Note shall immediately, automatically and irrevocably be deemed to have been converted into DIP Loans (the “Initial Refinancing”), and upon the entry of the Final Order, an additional $8,541,666.66 of the Tranche B Prepetition Note shall immediately, automatically and irrevocably be deemed to have been converted into DIP Loans (the “Subsequent Refinancing”) and the DIP Loans created by each of the Initial Refinancing and the Subsequent Refinancing shall be entitled to all the priorities, privileges, rights, and other benefits afforded to the other DIP Obligations under this Interim Order, the Final Order and the DIP Documents, in each case subject to the terms and conditions set forth in the Interim Order, the Final Order, the DIP Documents and the reservation of rights of parties in interest in paragraph 20 of the Interim Order.
- Maturity Date: The Maturity Date means the earliest to occur of (a) the Scheduled Maturity Date; (b) the date of acceleration of the Term Loans and termination of the Commitments following an Event of Default; (c) the effective date of a plan of reorganization or liquidation confirmed in any of the Chapter 11 Cases, (d) the consummation of a sale of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code or otherwise, other than in connection with a confirmed plan of reorganization or liquidation in the Chapter 11 Cases or as otherwise approved by the Agent in its reasonable discretion and (e) without the Agent’s prior written consent, the date of filing or express written support by any Debtor of a plan of liquidation or reorganization and related disclosure statement, or order of dismissal, in each case, that is not an Acceptable Wind-Down.
- Interest Rate: Each Term Loan shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the Applicable Margin. “Applicable Margin” means 7.5% per annum.
- Default Interest: An additional 2%.
Corporate Structure Chart
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