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May 19, 2020 – The Debtors filed a motion requesting Court authority to wind-down their retail operations as soon as stores begin reopening following COVID-19 closures [Docket No. 671]. The Debtors' motion is brutally clear-headed and concise; the global pandemic has completely "derail[ed] all efforts to secure a going-concern bidder…upending the financial models underpinning the going-concern debt-for-equity exchange" anticipated by the Debtors as they entered Chapter 11 and leaving them with "no currently-available governmental support or ‘best-case scenario’ business plan [that] will provide sufficient liquidity to facilitate ongoing operations." Hammering home the futility of the Debtors' going-concern sale aspirations, the Debtors note that their financial modeling includes a previously unanticipated $100.0mn tax refund related to CARES Act legislation and conclude with the chilling assessment that "Pier 1’s future does not involve any brick-and-mortar retail locations."
Further to their new wind-down plans, the Debtors have now obtained a further $40.0mn of debtor-in-possession ("DIP") financing from their existing DIP lenders and will begin negotiating a holistic settlement of the Debtors' Chapter 11 cases. That settlement is expected to see DIP lenders repaid in full and the remaining liquidation proceeds split amongst term lenders and administrative claim holders.
In a May 19th press release, the Debtors announced that they were seeking Court "approval to begin an orderly wind-down of the Company’s retail operations as soon as reasonably possible after store locations are able to reopen following the government-mandated closures during the COVID-19 pandemic. As part of the wind-down, the Company intends to sell its inventory and remaining assets, including its intellectual property and e-commerce business, through the court-supervised process.
The Debtors' CEO Robert Riesbeck commented: “This decision follows months of working to identify a buyer who would continue to operate our business going forward. Unfortunately, the challenging retail environment has been significantly compounded by the profound impact of COVID-19, hindering our ability to secure such a buyer and requiring us to wind down.”
The motion states, “The Debtors began these chapter 11 cases facing an already challenging retail environment. And yet, despite these challenges, the Debtors arrived in these cases with the support from its lenders for a going-concern plan and sale process. The global pandemic upended these plans, completely derailing all efforts to secure a going-concern bidder and upending the financial models underpinning the going-concern debt-for-equity exchange contemplated by the Plan Support Agreement. During the Limited Operation Period, the DIP Lenders have continued to fund the Debtors’ operations and are currently projected to be in an over advance position of approximately $40 million. This over advance is necessary even as the Debtors plan to reopen a number of stores and begin generating revenue on or around May 22. Based on the Debtors’ current projections of go-forward business and an analysis of options, no currently-available governmental support or ‘best-case scenario’ business plan will provide sufficient liquidity to facilitate ongoing operations. In addition, the Debtors are unable to procure an exit credit facility in the current market.
It is now clear that Pier 1’s future does not involve any brick-and-mortar retail locations. After pursuing every available alternative and engaging in conversations with the DIP Lenders, the Ad Hoc Group of Term Lenders, the Creditors’ Committee, and all parties who expressed interest in purchasing the Debtors’ stores and assets — and considering all available government support —the Debtors are left with no choice but to wind down their retail operations and seek to sell all remaining assets, including their intellectual property and e-commerce business (the ‘Wind-Down’).
The Debtors have taken two key steps to facilitate an orderly Wind-Down. First, the Debtors have negotiated with the DIP Lenders for incremental capital. More specifically, the DIP Lenders have continued to fund these cases even as the Debtors are currently projected to overdraw the DIP Facility by approximately $40 million in accordance with the contemplated Wind-Down Budget — which the Debtors continue to refine and intend to file ahead of the status conference on May 21.
Second, the Debtors, the DIP Lenders, the Ad Hoc Group of Term Lenders, and the Creditors’ Committee are negotiating a holistic settlement for these cases, including finalizing the Wind-Down Budget, and a chapter 11 plan (the ‘Term Sheet’). The Debtors are hopeful to include a draft of the Term Sheet with the Debtors’ May 21 status report with respect to the Limited Operation Period [Docket No. 629] (the ‘Status Report’).
The key terms the Debtors expect to be incorporated in the Term Sheet (all of which remain subject to ongoing negotiations) include:
- the Wind-Down Budget (covering Wind-Down expenses which have not yet been agreed with the DIP Lenders, the Ad Hoc Group of Term Lenders, and the Creditors’ Committee, including payment of all rent obligations and payment of certain employee wages and benefits for working employees);
- payment in full of DIP claims;
- payment to the term lenders of IP sale proceeds, subject to the terms of the Final DIP Order;
- a splitting of liquidation proceeds (after payment of DIP claims in full) between the term lenders and administrative claim holders, including claims entitled to administrative priority under section 503(b)(9);
- standard release, exculpation, and injunction provisions to bring finality to these chapter 11 cases for all stakeholders; and
- a preference waiver for any party holding a general unsecured claim.
The Debtors will continue to facilitate the diligence necessary for each of the major stakeholders — the DIP Lenders, the Ad Hoc Group of Term Lenders, and the Creditors’ Committee — to be in a position to move these cases forward to closure as soon as reasonably practicable. It starts with alignment on the Term Sheet this week.
Accordingly, by this Motion, the Debtors are taking the prudent and responsible step of seeking authority to begin an orderly liquidation of their remaining store operations as soon as reasonably possible after operations are able to resume. Specifically, the Debtors seek to sell any and all of their remaining assets, including their intellectual property and e-commerce business, pursuant to the Bidding Procedures Order (the ‘Asset Sale’) and to liquidate inventory in their closing stores pursuant to the Store Closing Order.”
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