October 30, 2020 – The Debtors notified the Court that their Wind-Down Plan had become effective as of October 30, 2020 [Docket No. 843]. The Court had previously confirmed the Debtors’ Plan on October 5, 2020 [Docket No. 806].

On January 22, 2020, in order to further a “strategic sale process,” Fairway Group Holdings Corp. and 25 affiliated Debtors (“Fairway” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 20-10161. At filing, the Debtors, a leading food retailing destination in the Greater New York City metropolitan area, noted estimated assets between $100.0mn and $500.0mn and estimated liabilities between $100.0mn and $500.0mn. The Debtors also disclosed that “as of November 2019, Fairway’s unaudited consolidated financial statements reflect…assets totaling approximately $158.9 million and liabilities totaling approximately $288.7 million.”

The Debtors were represented by Weil, Gotshal & Manges LLP. Further board-authorized engagements include (i) PJ Solomon as investment banker, (ii) Mackinac Partners as financial advisors and (iii) Omni Agent Solutions as claims agent.

Overview of the Plan

The Debtors’ memorandum in support of Plan confirmation provides: “The Plan represents the final step in the successful administration of the Debtors’ chapter 11 cases. The Plan is the product of extensive good faith, arm’s-length negotiations and incorporates a global settlement among the Debtors, the Creditors’ Committee, and the Consenting Creditors (the ‘Global Settlement’), including a payment of $1.5 million to a recovery trust (the ‘GUC Recovery Trust’) for the benefit of holders of General Unsecured Claims. The Plan enjoys widespread creditor support as it was accepted by virtually every single creditor who voted on the Plan and only one limited objection to the Plan was filed, which the Debtors are working to resolve.

The Debtors commenced these chapter 11 cases to conduct a value maximizing marketing and sale process to sell as many of their stores on a going concern basis and preserve as many jobs as possible. The Debtors efforts have been successful resulting in five (5) separate sale transactions involving the sale of twelve (12) of their locations and related assets (collectively, the ‘Sale Transactions). The Sale Transactions have all been consummated resulting in aggregate sale proceeds of approximately $90 million for the Debtors’ estates as well as guaranteeing jobs for approximately 1,700 of the Debtors’ employees. All of the Sale Transactions have either been supported by or not opposed by the Debtors’ key stakeholders, including the Consenting Creditors, the Creditors’ Committee and UFCW Parties.

Significantly, the Plan has been accepted by almost 100% of creditors voting on the plan, including the General Unsecured Claims class. The Plan is supported by the Creditors’ Committee, the UFCW Parties, and the Consenting Creditors."

The Debtors’ Disclosure Statement [Docket No. 679] provides, “The final phase in these chapter 11 cases is the confirmation and consummation of the Plan, pursuant to which the Debtors will distribute the cash proceeds from the sale of their assets (the ‘Sale Proceeds’) to creditors generally in accordance with the absolute priority rule and section 1129 of the Bankruptcy Code, including full payment of any outstanding DIP Claims (unless the Plan Sponsor (as defined below) voluntarily elects to convert such DIP Claims into an exit facility and/or exchange all or a portion of its outstanding DIP Claims for the New Common Stock (the “DIP Conversion Election”), as defined below). As part of the Global Settlement among the Debtors, the Creditors’ Committee, the UFCW Parties and the Ad Hoc Group, $1.5mn will be contributed to a general unsecured recovery trust for the benefit of General Unsecured Claims. In addition, on or before August 15, 2020 (the ‘Reorganized Equity Plan Election Date’), Special Situations Investing Group, Inc. (the ‘Plan Sponsor’) had the right to make a Reorganized Equity Plan Election, pursuant to which certain of the Debtors (including Holdings) will pursue the Reorganization Transaction and reorganize around certain of the Debtors’ liquor licenses, inventory and related wine business (the ‘Reorganized Assets’) in exchange for the Plan Sponsor forfeiting a Reallocated Amount, which proceeds will be distributed on a Pro Rata basis to the other Senior First Out Term Loan Claimholders (other than Plan Sponsor). If the Plan Sponsor did not elect to make the Reorganized Equity Plan Election, the Reorganization Transaction will not be implemented, and the Reorganized Assets will be liquidated and distributed to Claimholders in accordance with the Plan.

In a Revised Proposed Plan Confirmation Order filed on September 30, 2020 [Docket No. 790], the Debtors stated, "The Reorganized Equity Plan Election Date was extended to September 8, 2020 by the Debtors. The Plan Sponsor delivered a timely executed Reorganized Equity Plan Election Notice and elected to consummate the Reorganization Transaction."

Specifically, the Plan provides for the following treatment of Claims and Interests:

• Holders of Senior First Out Term Loan Claims (Class 3), Senior Last Out Term Loan Claims (Class 4) and Holdco Loan Claims (Class 5) will receive their respective shares of the Net Cash Proceeds on a Pro Rata basis after directly senior Claims are satisfied in full.
• The Plan Sponsor will receive 100% of the New Common Stock of Reorganized Holdings and in exchange, the first $2.75mn of the Plan Sponsor’s Pro Rata share of the Net Cash Proceeds distributable to the Plan Sponsor on account of its Allowed Senior First Out Term Loan Claims shall be distributed to the remaining holders of the Senior First Out Term Loan Claims (other than the Plan Sponsor) on a Pro Rata basis (excluding the Claims held by the Plan Sponsor from the denominator for purposes of such calculation); provided that if the Reallocated Amount is less than $2.75mn, the Cash payable by the Debtors to satisfy DIP Claims in cash in full on the Effective Date in an amount equal to the difference between $2.75mn and the Reallocated Amount (such amount, the “Reallocated Amount Shortfall”) shall be distributed to the holders of Allowed Senior First Out Term Loan Claims (other than the Plan Sponsor) in an amount equal to the Reallocated Amount Shortfall; provided further that if the Debtors do not have sufficient cash on hand to make or reserve for distributions to holders of Administrative Expense Claims, Priority Tax Claims, Priority Non Tax Claims and Other Secured Claims on the Effective Date in accordance with the terms set forth in the Plan (such amount, the “Plan Confirmation Shortfall”), the Plan Sponsor shall be entitled to make a DIP Conversion Election in an amount necessary to cover such Plan Confirmation Shortfall, and the amount of such Plan Confirmation Shortfall shall reduce, on a dollar-for-dollar basis, the Reallocation Amount Shortfall.
• The GUC Recovery Trust Amount and the Unreleased Avoidance Actions (each as defined below) will be contributed to a recovery trust (the “GUC Recovery Trust”) for the exclusive benefit of General Unsecured Claims and proceeds thereof will be available for all holders of General Unsecured Claims to share on a Pro Rata basis. Holders of General Unsecured Claims will also be released of any preference or avoidance claims of the Debtors if such holders vote to accept the Plan or do not opt of the releases in Section 10.6(b) of the Plan.
• The DIP Claims, to the extent any DIP Obligations remain unpaid and the DIP Documents have not been terminated, will be paid in full in Cash or converted on a dollar-for-dollar basis, into the Reorganized Debtors Exit Facility or New Common Stock in the sole discretion of the Plan Sponsor.
• All Administrative Expense Claims, Priority Tax Claims, Priority Non-Tax Claims, Other Secured Claims and Intercompany Interests are unimpaired by the Plan.
• All Parent Equity Interests shall be deemed cancelled without further action by or order of the Bankruptcy Court and shall be of no further force or effect, whether surrendered for cancellation or not.

Global Settlement

The Plan incorporates a Global Settlement, which settles all disputes and potential litigation of all Claims and controversies relating to the Debtors and the treatment of General Unsecured Claims. In particular, the Global Settlement provides for, among other things, 

• (i) the establishment of the GUC Recovery Trust in accordance with Section 5.17 of the Plan; 
• (ii) a one-time payment in cash by the Debtors in the aggregate amount of $1.5mn (the “GUC Recovery Trust Amount”) as a carve out of the Prepetition Lenders’ Collateral to be transferred to the GUC Recovery Trust and contributed for the benefit of General Unsecured Claims, free and clear of all Liens, charges, Claims, encumbrances and interests for the benefit of the holders of Allowed General Unsecured Claims;
• (iii) $150k (the “GUC Recovery Trust Administrative Contribution Amount”) to be transferred by the Debtors to the GUC Recovery Trust and contributed for the administration of the GUC Recovery Trust, including any advisor fees;
• (iv) the Creditors’ Committee Budget to be provided by the Debtors to the Creditors’ Committee in an amount not exceeding $175k per month incurred by the Creditors’ Committee’s advisors from April 1, 2020 through and including the Plan Effective Date; and 
• (v) a commitment by the Creditors’ Committee not to object to or take any other action that is inconsistent with the Plan or approval of the Global Settlement.”

Asset Sales

The Debtors closed five separate sale transactions involving the sale oft 12 of their locations and related assets and which netted approximately $90.0mn for the Debtors’ estates. The highlight of the sale process was the $76.2mn sale of 5 New York City Fairway stores and a distribution center to Village Super Market, Inc. (“Village,” NASDAQ: VLGEA) [Docket No. 449]; a sale which was anticipated from the outset of these Chapter 11 cases.

In a press release announcing the filing, the Debtors advised that: "[T]he Company has entered into a stalking horse asset purchase agreement with Village Super Market, Inc. (NASDAQ: VLGEA) to sell up to 5 New York City Fairway stores and its Distribution Center for approximately $70 million."

Village's front runner status in respect of those assets was, however, briefly challenged by Bogopa Enterprises, Inc. whose $75.0mn bid was designated by the Debtors as the baseline in a March 11th filing [Docket No. 295].

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):

• Class 1 (“Priority Non-Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $700k and the expected recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $400k and the expected recovery is 100%.
• Class 3 (“Senior First Out Term Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $76.5mn and the expected recovery is 6.8% – 12.7%. Each holder shall receive such holder’s pro rata share of the Net Cash Proceeds until all Senior First Out Term Loan Claims are satisfied in full; provided that, upon the Reorganized Equity Plan Election, (i) the Reallocated Amount (defined below) shall be distributed to the remaining holders of Senior First Out Term Loan Claims (other than the Plan Sponsor) on a pro rata basis (excluding the Claims held by Plan Sponsor from the denominator for purposes of such calculation); (ii) the Plan Sponsor shall receive 100% of the New Common Stock; and (iii) the amount of the Plan Sponsor’s share of the Net Cash Proceeds distributable to the Plan Sponsor on account of its Senior First Out Term Loan Claims exceeding the Reallocated Amount shall be distributed to the Plan Sponsor; provided that if the Reallocated Amount is less than $2.75mn, the Cash payable by the Debtors to satisfy DIP Claims in full in cash on the Effective Date in an amount equal to the difference between $2.75mn and the Reallocated Amount (such amount, the “Reallocation Amount Shortfall”) shall be distributed to the holders of Senior First Out Term Loan Claims (other than the Plan Sponsor) in an amount equal to the Reallocation Amount Shortfall; provided further that if the Debtors do not have sufficient cash on hand to make or reserve for distributions to holders of Administrative Expense Claims, Priority Tax Claims, Priority Non-Tax Claims and Other Secured Claims on the Effective Date in accordance with the terms of the Plan (such amount, the “Plan Confirmation Shortfall”), the Plan Sponsor shall be entitled to make a DIP Conversion Election in an amount necessary to cover such Plan Confirmation Shortfall, and the amount of such Plan Confirmation Shortfall shall reduce, on a dollar-for-dollar basis, the Reallocated Amount Shortfall.
• Class 4 (“Senior Last Out Term Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $56.8mn and the expected recovery is 0%. Each such holder thereof shall receive such holder’s pro rata share of the Net Cash Proceeds as such holders are entitled to under applicable non-bankruptcy law after the Senior First Out Term Loan Claims are satisfied in full in Cash, until all Senior Last Out Term Loan Claims are satisfied in full.
• Class 5 (“Holdco Loan Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $51.0mn and the expected recovery is 0%. Each holder shall receive such holder’s pro rata share of the Net Cash Proceeds as such holders are entitled to under applicable Non-bankruptcy law after the Senior Last Out Term Loan Claims are satisfied in full in Cash, until all Holdco Loan Claims are satisfied in full.
• Class 6 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $100.0mn – $145.0mn and the expected recovery is 1.0% – 1.5%. Each holder shall receive (i) such holder’s pro rata share of (x) the GUC Recovery Trust Interests (entitling such holder to a pro rata share of the GUC Recovery Trust Net Assets [i.e. $1.5mn] in accordance with the GUC Recovery Trust Agreement); and (y) the Net Cash Proceeds after the Prepetition Loan Claims are satisfied in full in Cash, until all General Unsecured Claims are satisfied in full; and (ii) if such holder of a General Unsecured Claim satisfies the requirements to be a Released Avoidance Party, such holder shall be treated as a Released Avoidance Party.
• Class 7 (“Intercompany Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the expected recovery is 0%.
• Class 8 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the expected recovery is 100%.
• Class 9 (“Parent Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is $0 and the expected recovery is 0%.
• Class 10 (“Subordinated Securities Claims”) is impaired and deemed to reject the Plan. The aggregate amount of claims is $0 and the expected recovery is 0%.

Voting Results

On September 24, 2020, the Debtors’ claims agent notified the Court of the Plan voting results, which were as follows [Docket No. 771].

• Class 3 (“Senior First Out Term Loan Claims”) 7 claim holders, representing $80.8mn (100%) in amount and 100% in number, accepted the Plan.
• Class 4 (“Senior Last Out Term Loan Claims”) 21 claim holders, representing $53.0mn (100%) in amount and 100% in number, accepted the Plan.
• Class 5 (“Holdco Loan Claims”) 21 claim holders, representing $47.9mn (100%) in amount and 100% in number, accepted the Plan.
• Class 6 (“General Unsecured Claims”) 40 claim holders, representing $73.3mn (99.92%) in amount and 95.24% in number, accepted the Plan. 2 claim holders, representing $57,563 (0.08%) in amount and 4.76% in number, rejected the Plan.

Key Documents

The Disclosure Statement [Docket No. 679] attached the following exhibits:

• Exhibit A: Plan (Separately Filed at Docket No. 678])
• Exhibit B: Organizational Structure 
• Exhibit C: Liquidation Analysis 

The Debtors filed a Plan Supplements at Docket No. 725 and attached the following documents:

• Exhibit A: Amended Organizational Documents
• Exhibit B: 11 U.S.C. § 1129(a)(5) Information
• Exhibit C: GUC Recovery Trust Agreement
• Exhibit D: Schedule of Assumed Executory Contracts and Unexpired Leases
• Exhibit E: Reorganized Debtors Exit Facility Term Sheet

2016 Bankruptcy Overview

In the 2016 prepackaged cases (confirmed in June 2016 by the U.S. Bankruptcy Court in the Southern District of New York, lead case number 16-11241), the Debtors’ reduced their funded debt by approximately $195.0mn when their then-existing secured creditors agreed to exchange approximately $279.0mn of debt for (i) 100% of equity of the reorganized Company (subject to dilution by up to 10% by a management incentive program), (ii) a $45.0mn last out exit term loan (the ‘Last Out Exit Term Loan’) with Fairway Acquisition as borrower and each of the other Fairway subsidiaries as guarantors, secured by all of the assets of Fairway, and (iii) a $39.0mn million unsecured subordinated term loan (the “Subordinated Term Loan”) with Holdings as borrower, but which was not guaranteed by the other Fairway subsidiary entities. 

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Declaration”) [Docket No. 4], Abel Porter, the Debtors’ Chief Executive Officer, detailed the events leading to Fairway’s Chapter 11 filing. The Declaration details a confluence of factors, the most important being a surge in online and alternative sources of food that has put enormous pressure on traditional, low-margin, supermarkets; but saves special attention for the Debtors’ existing (and costly) pension arrangements. Pension costs, the Declaration argues, that are unsustainable given the macro competitive backdrop. It’s not just our view, the Declaration points out in detailing the Debtors’ marketing efforts to date: “No bidder has been willing to assume Fairway’s  liabilities—in particular, the Company’s substantial labor and pension obligations—in  connection with a purchase of Fairway’s stores.” Clearly the Debtors, engaged in a sales effort, want to highlight the potentially rejectable pension obligations as a straw that breaks an otherwise potentially healthy camel’s back. But with or without pension obligations, and not forgetting that the Debtors benefited from the jettisoning of $195.0mn of debt in the 2016 cases), the Declaration’s description of the competitive environment for supermarkets is downright scary, especially as to those located in densely populated areas.

The Declaration states: “Unfortunately, this is Fairway’s second chapter 11 filing in four (4) years.

Following Fairway’s emergence from chapter 11 in June 2016, Fairway continued to face headwinds in the market, which have continued to this date…

As to competitive issues the Declaration states: “The food retail industry as a whole, particularly in the Greater New York City metropolitan area, is highly competitive, and increasingly so in recent years. According to the Food Marketing Institute, the percentage of American consumers who called supermarkets their ‘primary grocery store’ has fallen from 67% in 2005 to 49% in 2018. Fairway  experiences competitive pressures across multiple market segments including from local, regional, national and international supermarket grocers such as Stop & Shop (owned by Royal Ahold), Whole Foods, Aldi, Trader Joe’s, King Kullen, Gristede’s, Citarella, Save-A-Lot and Lidl, convenience stores such as 7-Eleven, dollar stores such as Dollar General and Dollar Tree, retail drug chains such as CVS, Walgreens and Rite Aid, supercenters such as Walmart and Target, club stores such as Costco, BJ’s and Sam’s, and numerous independent and specialty stores. The Company also faces rapidly intensifying competition from well-capitalized online retail grocery giants such as Amazon, Walmart, and Target, as well as local online grocers such as FreshDirect and Peapod and meal-kit operators like Blue Apron and Hello Fresh. According to Coresight Research, nearly 40% of Americans bought groceries online in 2019, up from under 30% in 2018. 

Finally, given the Company’s extensive prepared and fresh food offering, it competes directly with countless full service, casual dining, fast casual, quick service restaurants, many of which offer free delivery; specialty coffee shops such as Starbucks and other specialty food retailers, particularly in Manhattan…. The density of the Greater New York City metropolitan area compounds the problem because of the geographic proximity between Fairway’s stores and those of their competitors.

The scale advantages that extremely large grocers, such as Amazon, Walmart, Target, Costco, BJ’s, Stop & Shop (Ahold), CVS, Walgreens, Aldi, Lidl, Dollar General and Dollar Tree have over regional grocers like Fairway cannot be overstated. These larger grocers all have investment grade credit ratings, which makes their cost of capital meaningfully lower and affords them extraordinary capacity to invest in lower prices, higher wages, more advertising, more effective modern technology and further growth, all of which enhance the probability a consumer will become and remain their customers. Fairway’s comparable store sales decreased approximately 5% in the fifty-two (52) weeks ended January 12, 2020 compared to the fifty-two weeks ended January 13, 2019.

Additionally, approximately 83% of the Company’s workforce is unionized. The workforces of some of the Company’s most significant competitors are not unionized, resulting in lower labor, pension and benefit costs than the Company faces."

On the Debtors’ inability to make capital investments, the Declaration continues: “Capital improvements and investment in operations are imperative for food retailers 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 of the Company’s stores need renovations that would enhance customers’ shopping experience and generate increased revenues.

The Company’s increased leverage and liquidity constraints, however, have impeded its ability to invest in store renovations and in other capital and operational expenditures at the level and speed at which the food industry is evolving. 

On labor and pension costs, the Declaration adds: “The Debtors’ cost structure includes certain employee and labor-related costs that have historically driven down their profit margins. Pursuant to the CBAs, the Debtors are required to contribute to a multi-employer pension plan administered by a local United Food and Commercial Workers union, entitled the UFCW Local 1500 Pension Plan that also covers collectively-bargained employees of certain unaffiliated entities (‘Pension Plan’). The Debtors also participate in a multiemployer health and welfare plan (the ‘UFCW Local 1500 Welfare Fund’) that provides benefits to employees represented by UFCW Local 1500, UFCW Local 371 and UFCW Local 1262. The expenses for the UFCW Local 1500 Welfare Fund total approximately $750k per month (or approximately $9.0mn in the aggregate in 2019), of which the Company pays approximately 92% (approximately $8.3mn per year).

As of August 14, 2019, the Debtors were provided actuarial information that estimated that the present value of unfunded benefits for the purposes of withdrawal liability is approximately $67.0mn. The unfunded liabilities of this Pension Plan may require increased future payments by other participating employers. As a result, the Pension Plan has adopted a rehabilitation plan to increase the plan’s funding percentage. The Debtors’ payments on account of the Pension Plans amount to $361,731 per month, which the Debtors have diligently paid over time until shortly prior to filing these Chapter 11 Cases, when liquidity became severely restricted.

The CBAs also mandate wage increases each year irrespective of sales. The company’s average hourly wage increased from $13.20 in Fiscal Year 2018 to $14.46 in Fiscal Year 2019 and to an expected $15.78 in Fiscal Year 2020, an increase of approximately 20%.

The Debtors also maintain third-party workers’ compensation insurance for all fourteen (14) of their stores (collectively, the ‘Workers’ Compensation Program’). The Debtors estimate that the pay approximately $4.5mn per year for premiums in connection with the Workers’ Compensation Program.”

The Debtors’ Prepetition Capital Structure

Liquidation Analysis (see Exhibit E to Disclosure Statement [Docket No. 679] for notes)

About the Debtors

The Debtors provide: “Fairway Market is a unique food retailer offering customers a differentiated one-stop shopping experience as ‘The Place To Go Fooding.’ Fairway has established itself as a leading food retail destination in the Greater New York City metropolitan area, recently expanding with the opening of The Cooking Place in June 2019, a cooking school that brings the same passion and philosophy about fooding to its customers. Fairway Market offers an extensive selection of fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings, along with a full assortment of conventional groceries.”

The Declaration [Docket No. 4] adds: “Fairway is a leading food retailing destination in the Greater New York City metropolitan area.  Fairway operates fourteen (14) supermarkets across the New York, New Jersey and Connecticut tri-state area, including two with freestanding wine and liquor stores (the Stamford and Pelham locations) and two with in-store wine and liquor stores (the Woodland Park and Paramus locations).  The Company’s flagship store is located at Broadway and West 74th Street, on the Upper West Side of Manhattan, featuring a cafe, Sur la Route, and state of the art cooking school.  Fairway employs over 3,000 individuals, approximately 83% of whom are represented by unions.”

Corporate Structure Chart (see also Exhibit A of Docket No. 4)

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