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August 23, 2020 – KB US Holdings, Inc. and nine affiliated Debtors (“KB” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 20-22962. The Debtors, the parent company of King Food Markets and Balducci's Food Lover's Market, are represented by Vincent Indelicato of Proskauer Rose LLP. Further board-authorized engagements include (i) Ankura Consulting Group LLC as financial advisors (Ankura to provide M. Benjamin Jones as Chief Restructuring Officer), (ii) Peter J. Solomon as investment banker and (iii) Prime Clerk as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn (funded debt $114.2mn). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Porky Products ($2.8mn), (ii) Fresh Pro Food Distributors/Rlb Food Distributors ($2.7mn trade claim) and (iii) Kehe Distributors LLC ($2.1mn trade claim).
In a press release announcing the filing, KB advised that: “it has accepted a stalking horse bid from TLI Bedrock to purchase the Company for $75 million. To facilitate an orderly sale, KB and its subsidiaries have commenced voluntary Chapter 11 proceedings…”
The Debtors have commitments from prepetition lender Whitehorse Finance, LLC for a new money revolving credit facility in an aggregate principal amount not to exceed $20.0mn, including a sublimit of $5.0mn for the issuance of letters of credit, and which will include a roll-up of certain prepetition obligations. The Debtors believe that the debtor-in-possession ("DIP") financing, combined with cash generated from ongoing operations, will be sufficient to see them through the sale process.
As of the Petition date, the Debtors have outstanding funded debt obligations in the amount of approximately $114.2mn owed under the 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 is approximately $20.5mn.
Stalking Horse Agreement
The Jones Declaration provides: "Following extensive negotiations with various potential bidders, and discussions with their advisors, on July 13, 2020, the Debtors entered into a stalking horse asset purchase agreement (the ‘Stalking Horse Purchase Agreement’) with TLI Bedrock LLC (the ‘Stalking Horse Bidder’).
The Stalking Horse Purchase Agreement provides for the sale of 30 stores, for the aggregate purchase price of approximately $75 million (the ‘Stalking Horse Bid’). The Stalking Horse Purchase Agreement requires the Stalking Horse Bidder to negotiate with the Unions, in consultation with the Debtors, to seek a consensual agreement on the terms of employment with affected employees. The Stalking Horse Bid is subject to higher or better offers in accordance with the Bidding Procedures. The Debtors continue to engage with other interested parties as part of the sale process.
While the Prepetition Sale Process has generated some interest, no potential purchaser was willing to assume all of KB’s liabilities—particularly those relating to the Debtors’ labor and pension obligations—in connection with the purchase of the KB’s assets. The Stalking Horse Bidder and other potential purchasers in the Prepetition Sale Process have conditioned their purchase of the Debtors’ assets free and clear of all liabilities (except certain assumed liabilities), such as those arising under or related to the CBAs and multiemployer contribution and withdrawal liabilities. The Stalking Horse Purchase Agreement required the Stalking Horse Bidder to engage in negotiations with the Unions for a 30-day prepetition period, with the goal of reaching a consensual resolution that would avoid the costs and expenses associated with a protracted bankruptcy.
The Stalking Horse Bidder and the Unions were unable to reach a consensual deal within the 30-day prepetition period provided under the Stalking Horse Purchase Agreement. The Stalking Horse Purchase Agreement requires the Debtors to secure the modification of collective bargaining agreements required by the Stalking Horse Bidder, either through negotiations, or absent the Unions’ agreement, through seeking relief pursuant to Bankruptcy Code sections 1113 and 1114. Accordingly, the Board concluded in the exercise of its business judgment and as fiduciaries for all of KB’s stakeholders that the best and only viable path to maximize the value of KB’s business and preserve thousands of jobs is to commence these Chapter 11 Cases to facilitate a sale free and clear of liabilities and seek relief through Bankruptcy Code sections 1113 and 1114, if necessary, with respect to the Debtors’ labor and pension obligations. The Debtors believe that if they cannot achieve a free and clear sale within the required time period prescribed by the Milestones (as defined below), all of the value created and preserved through the Prepetition Sale Process will be lost, and the Debtors could be left with no choice but to liquidate their business in a fire sale and piecemeal fashion."
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.
Corporate Structure Chart
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