October 30, 2020 – The Debtors filed an amended Plan and a related Disclosure Statement [Docket Nos. 331 and 332, respectively]; and further filed a redline of each document showing changes to the version filed on September 22, 2020 [Docket Nos. 333 and 334, respectively].

Changes to the Amended Plan and Disclosure Statement largely reflect the approval of a sale of 30 of the Debtors' stores to Acme Markets, Inc. In accordance with the Sale Agreement, Holders of Prepetition Secured Loan Claims will receive ratable shares of the sale proceeds and excess cash (effectively whatever is left after funding wind-down costs, the payment of professional fees and the payment of administrative claims).

The Amended Disclosure Statement [Docket No. 332] provides: "the Debtors anticipate that, following Confirmation of the Plan, the Sale Transaction will close, the Acquired Assets will have be transferred to the Acme, and Acme will pay the Sale Proceeds to the Debtors in accordance with the Sale Transaction Documentation. The Plan proposes that on the Effective Date, the Debtors shall fund the Effective Date Cash Amount (i.e., the Wind-Down Amount, the Professional Fee Reserve, and the Administrative and Priority Claims Reserve) from the Debtors’ Cash on hand, the Sale Proceeds and any other liquid assets of the Debtors following the Sale Transaction (including any proceeds under the DIP Facility) (and, with respect to the Professional Fee Reserve, amounts in the Professional Fees Escrow Account pursuant to Article II.C.2 of the Plan). In the event that Excess Cash remains in the Administrative and Priority Claims Reserve, the Wind-Down Trust or the Professional Fee Reserve after payment of all Allowed Claims to be paid therefrom pursuant to the terms of the Plan, such Excess Cash shall be paid in Ratable Shares to the Holders of Allowed Class 3 Claims." 

The Amended Disclosure Statement further notes, “Generally speaking, the Plan:

• provides that Administrative Claims, Priority Tax Claims, Professional Fee Claims, Other Priority Claims and Other Secured Claims will be unimpaired;
• provides that each Holder of a DIP claim will receive Cash equal to the Allowed amount of such Claim;
• provides that each Holder of a Prepetition Secured Loan Claim will receive an amount equal to its Ratable Share of the (i) Sale Proceeds remaining after deducting the Effective Date Cash Amount and payment of the DIP Claims and (ii) Excess Cash;
• provides that all General Unsecured Claims, Prepetition Secured Loan Deficiency Claims, Intercompany Claims, Intercompany Interests, Section 510(b) Claims and Interests in Holdings will be cancelled, released and extinguished as of the Effective Date and will be of no further force or effect, and each Holder of such Claim or Interest will not receive any distribution on account of such Claim or Interest; and
• designates a Plan Administrator to (i) wind down the Debtors’ remaining businesses and affairs following consummation of the Sale Transaction; (ii) pay and reconcile Claims as provided in the Plan; and (iii) administer the Plan in an effective and efficient manner.”

The following is an amended summary of classes, claims, voting rights and expected recoveries with changes in bold (defined terms are in the Plan and/or Disclosure Statement):

• Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is 100%.
• Class 3 (“Prepetition Secured Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $71.2mn and the estimated recovery is up to 100%. Each Holder of a Prepetition Secured Loan Claim shall receive an amount equal to its Ratable Share of the (i) Sale Proceeds remaining after deducting the Effective Date Cash Amount and payment of the DIP Claims and (ii) Excess Cash.
• Class 4 (“General Unsecured Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%
• Class 5 (“Prepetition Secured Loan Deficiency Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
• Class 6 (“Intercompany Claims”) is impaired deemed to reject, and not entitled to vote on the Plan. The estimated recovery is 0%
• Class 7 (“Intercompany Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%
• Class 8 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%
• Class 9 (“Interests in Holdings”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%

Amended Key Dates:

• Voting Record Date: November 9, 2020
• Voting Deadline: December 9, 2020
• Plan Objection Deadline: December 9, 2020
• Confirmation Hearing: December 18, 2020

Asset Sale

On October 26, 2020, the Court approved a Sale transaction [Docket No. 307] that provides for the sale of the Debtors’ stores for a purchase price of $96.4 million in cash, plus the assumption of approximately $25 million in underfunded pension liabilities and certain additional liabilities. The Sale Transaction Documentation provides for “staggered” closings, by which Acme will acquire the Acquired Assets in groups beginning no earlier than 60 days from the entry of the Sale Order. The Sale Transaction also requires approval of the Federal Trade Commission. The Debtors are continuing to market six of the eight stores that are not included in the Sale Transaction. The Debtors closed the remaining two stores in September 2020.

The asset purchase agreement (the “APA”) governing the terms of the sale is attached to the order as Exhibit 2.

On October 14th, the Debtors designated the Buyer as the successful bidder and stalking horse TLI Bedrock as the back-up bidder [Docket No. 266]. TLI Bedrock had paced bidding with a $75.0mn offer and is entitled to payment of a $2.63mn break-up fee and reimbursement expenses of up to $550k if the Debtors close on a sale to Acme or another party.

ACME is a division of Boise, Idaho based Albertsons Companies, Inc., (NYSE: ACI) which is the second-largest supermarket chain in North America and 32% owned by Cerberus Capital Management, L.P. As to the acquisition of the Debtors (which for the 2,300 store supermarket giant did not even trigger an 8-K filing requirement), the Buyer announced: "Upon the successful completion of the transaction, the stores will become part of the Mid-Atlantic division of Albertsons Companies, which operates ACME and Safeway stores on the east coast. The winning bid for the package and expected purchase price is $96.4 million."

In an October 14th press release of their own, the Debtors stated: "Both Kings Food Markets and Balducci's Food Lover's Market will continue to serve their communities under their own banners through and after the closing of the sale."

Prepetition Indebtedness

As of the Petition date, the Debtors had outstanding funded debt obligations in the amount of approximately $114.2mn owed under their Prepetition Credit Agreement, consisting of (i) approximately $3.0mn outstanding under the Prepetition Revolver and (ii) approximately $111.2mn (which includes approximately $10.7mn in accrued and unpaid interest) outstanding under the Prepetition First Lien Term Loan. 

As of July 25, 2020, the Debtors estimate that the aggregate amount of trade claims outstanding was approximately $20.5mn.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Jones Declaration”), M. Benjamin Jones, the Debtors’ Chief Restructuring Officer, detailed the events leading to KB’s Chapter 11 filing. The Jones Declaration cites intense competition in its key markets, liquidity constraints which have precluded necessary capital expenditures (compounding competition concerns) and the costs of a largely unionized workforce (again, given non-unionized competitors, impacting competitiveness), all capped off by COVID-19.

The Jones Declaration provides: “Competition: The retail food industry, especially in the New York City and Washington, D.C. metro areas, is highly competitive. KB experiences competitive pressures across multiple market segments, including from local, regional, national and international supermarket grocers such as Stop & Shop (Ahold), Shop Rite, Whole Foods (Amazon), Trader Joe’s, as well as club stores such as Costco, Sam’s (Walmart) and BJ’s; drug store grocers such as CVS and Walgreens; discount grocers such as Aldi, Lidl, Dollar General, Family Dollar and Save-A-Lot, and numerous independent and specialty stores. The Debtors also face rapidly intensifying competition from well-capitalized online grocery giants such as Amazon, Walmart and Target, as well as local online grocers such as FreshDirect and meal-kit operators like Blue Apron and Hello Fresh. Furthermore, KB’s extensive prepared and fresh food offerings compete directly with countless full service, casual dining, fast casual, quick service restaurants, many of which offer free delivery (including through services such as DoorDash and UberEats); specialty coffee shops such as Starbucks and other specialty retail grocers. In addition, some of KB’s competitors have expanded aggressively in marketing a range of natural and organic foods, prepared foods and quality specialty grocery items. The density of the New York City and Washington, D.C. metro areas further compounds the competitive nature of the Debtors’ business because of the geographic proximity between KB’s stores and its competitors. 

Extremely large grocers, such as Amazon/Whole Foods, Walmart/Sam’s, Costco and Stop & Shop (Ahold) also have significant scale advantages over regional grocers like KB. These larger grocers all have investment-grade credit ratings, which makes their cost of capital meaningfully lower and affords them extraordinary capacity to sell products at lower prices, pay higher wages, conduct more advertising and invest in modern technology, all of which enhance the probability a consumer will become and remain their customer. 

Liquidity Constraints: Prior to the COVID-19 pandemic, KB experienced historically low EBITDA generation as a result of the industry pressures discussed above. The reduced EBITDA increased KB’s leverage and imposed significant strains on the Company’s liquidity and cash flows. The strain on the Company’s liquidity has been exacerbated by the costs associated with the Company’s labor and pension costs, as described below. Although the Company’s liquidity has improved during the COVID-19 pandemic, the Company recognizes that its current liquidity is only temporary and that it must seek a permanent solution to address its historical liquidity constraints. 

Inability to Make Capital Investments: Capital improvement and investment in operations are imperative for retail grocers to keep pace with their competition. Market participants are introducing technological advances and other initiatives to customize and improve consumer experience. Companies are also implementing cost-saving technologies and practices that allow them to further lower their prices, including in the areas of labor scheduling, ordering, receiving, payment processing and data analytics. Additionally, some KB stores are in need of renovations to enhance customers’ shopping experience and generate increased revenues. The Company’s increased leverage and liquidity constraints have impeded its ability to invest in store renovations and other capital and operational improvements at the level and speed at which the food industry is evolving. 

Union Wage and Employee Benefit Costs: Additionally, excluding any of the Balducci’s stores, approximately 66% of KB’s workforce is unionized. Some of KB’s most significant competitors have non-union workforces, resulting in lower labor, pension and benefit costs than KB faces. As a result, these competitors can lower prices to their customers, putting pressure on KB to do the same, further reducing KB’s profit margin. Non-union grocers also generally have more free cash flow to invest in advertising and technology to drive customer traffic and loyalty. 

The Debtors’ cost structure includes certain union wage and employee benefit costs that have historically driven down their profit margins. Pursuant to CBAs with UFCW Local Union Nos. 1245 (now known as Local No. 360), 464A and 1500, the Debtors are required to contribute to multiemployer defined benefit pension funds on behalf of their employees represented by each respective local union….Based on the most recent information available to the Debtors, two of the Defined Benefit Pension Plans are underfunded. The underfunded plans are the Local 1245 Plan and the Local 1500 Plan. The Debtors were provided actuarial information from the Local 1245 Plan that estimated that if the Debtors terminated their participation in that plan during the plan year that ended December 31, 2019, they would have been assessed withdrawal liability in the amount of $30,963,230. The Debtors were provided actuarial information from the Local 1500 Plan that estimated that if the Debtors terminated their participation in that plan during the plan year that ended December 31, 2018, they would have been assessed withdrawal liability in the amount of $1,030,480.

COVID-19: The COVID-19 pandemic has further intensified the industry headwinds KB has faced. The Company…has implemented various safety measures such as limiting the number of guests in a store at one time, regular cleaning and disinfecting procedures, and providing protective equipment and barriers at check-out stations. The pandemic has also put a strain on the Company’s supply chain—limiting the ability of the Debtors to maintain inventory of certain items at its stores – and prevented the Company from offering some of its signature services such as catering.”

About the Debtors

KB US Holdings Inc. is the parent company of King Food Markets and Balducci’s Food Lover’s Market.  

Kings Food Markets. For more than eighty years Kings has been rated one of the finest food stores to serve New Jersey, Long Island and Connecticut. Long before the national trend led other grocers to “local” and “organic,” Kings understood that their clientele, located in many of the finest towns in America, cared about freshness, sustainability, quality and the provenance of their food. From the freshest produce and cheeses, to the finest meats, poultry and fish, the in-store experience is enhanced by Kings’ associates who pride themselves on customer service. Kings is based in Parsippany, N.J., with twenty-five stores serving the region. 

Balducci’s Food Lover’s Market. What began in 1916 as a small vegetable pushcart in the heart of New York City, Balducci’s became, over its 104-year history, America’s leading gourmet specialty food shop. Offering the finest foods – cheeses and meats, fish, fresh produce and grocery items from the exotic to the most luxurious, Balducci’s prides itself on presenting not just the best brands from every corner of the globe, but a gold standard private label too. Balducci’s has an executive chef cooking in every market with catering available as well. Balducci’s markets are located in New York, Connecticut, Maryland and Virginia.

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