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April 30, 2020 – Rubie's Costume Company, Inc. and five affiliated Debtors (the “Rubie's Group” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of New York, lead case number 20-71970. The Debtors, the world’s largest designer, manufacturer, and distributor of costume and related party accessories, are represented by Frank A Oswald of Togut, Segal & Seqal LLP. Further board-authorized engagements include (i) Meyer, Suozzi, English & Klein, P.C. as general bankruptcy counsel, (ii) BDO USA, LLP as restructuring advisors, (iii) SSG Capital Advisors, LLC as investment bankers and (iv) Kurtzman Carson Consultants 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 $50.0mn and $100.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Warner Bros. ($1.9mn trade debt), (ii) WUYI JINGJIE Clothing Co Ltd ($1.1mn trade debt) and (iii) Sun Wah Jian Jing Plastic Manufactory ($1.1mn trade debt).
Goals of the Chapter 11 Filings
The Beige Declaration (defined below) states: "These chapter 11 filings give the Debtors the essential breathing space that they need to overcome this short term liquidity crisis caused by the COVID-19 crisis and the actions of the Bank Group. These chapter 11 cases allow for the Debtors to access the use of cash collateral to fund operations and payroll immediately and obtain a DIP financing facility, all pending the placement of an asset based lending facility as exit financing. The Debtors have undertaken extensive efforts, with the aid of consultants and advisors, to obtain same and are confident that it will be achieved. The Debtors anticipate that obtaining a replacement facility, while continuing to operate in the ordinary course, will take between 90 and 120 days."
Recent Operating Results
For the fiscal year ending December 31, 2019 the Debtors generated net sales and Adjusted EBITDA of approximately $268.0mn (a $42.0mn decline on 2018) and $3.0mn (a $5.0mn decline), respectively. The Debtors project a further 18% decline for 2020 based on the impact of COVID-19, with “…net sales and Adjusted EBITDA of approximately $220 to $230 million and $7 to $8 million, respectively.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Beige Declaration”), Marc P. Beige, the Debtors' President, detailed the events leading to [the Debtors' Chapter 11 filing. The Beige Declaration points the finger squarely at COVID-19 and the knock-on decision of the Bank Group (notably Wells Fargo) to pull the financing plug.
The Declaration goes to lengths to note that Wells Fargo assured them that the decision was based on "conditions in the global lending market due to the COVID-19 crisis and internal restrictions on its current lending, and was not a reflection on the Debtors’ creditworthiness."
There is, however, clearly more to the story than that and the Beige Declaration, which notes up front a decline in revenues that precedes COVID-19, ultimately concedes that there are "other factors;" including "insolvency of a number of the 10 major trading partners, and the decision of many of Rubie’s licensors to grant non-exclusive licenses thereby allowing a multitude of other manufacturers/wholesalers to obtain licenses for certain popular designs and images."
The Beige Declaration states: "The Debtors’ operating results have deteriorated in recent years primarily due to shifts in the industry. Independent customers have declined and the average order per existing customer also has declined.
The filing of these cases has been caused by a number of factors, including the COVID-19 worldwide crisis, that began in China in late 2019 with worldwide effects starting in January, 2020. In 2019, even before the start of the COVID-19 crisis, the Debtors implemented comprehensive cost cutting programs to bring operating expenses in line with revenue…However, the COVID crisis has had an impact on the Debtors’ ability to obtain new financing from the Bank Group.
The Bank Group has declined to provide continued financing and the Debtors’ efforts to obtain replacement financing on an asset based lending structure have been slowed by the crisis. Notwithstanding, as further explained below, the Debtors are optimistic that a financing package will become available for them over the next 60 to 90 days.
The Bank Group’s refusal to extend the existing financing, notwithstanding a series of forbearance agreements, extensive discussions with the Debtors’ management and advisors and significant concessions by the Debtors to the Bank Group in the form of the payment of significant fees, the granting of additional collateral and the granting of releases, has forced the Debtors into a liquidity crisis."
The Beige Declaration continues: "… on April 15, 2020, that lender, Wells Fargo, advised the Debtors that it would not participate further in the effort to construct replacement financing for the Debtors in the form of an asset based lending facility. It advised the Debtors that its decision was based on the conditions in the global lending market due to the COVID-19 crisis and internal restrictions on its current lending, and was not a reflection on the Debtors’ creditworthiness.
Following this sudden and unexpected news from Wells Fargo, the Debtors obtained further extensions of the Forbearance Agreement, parsed out in two week increments, the latest providing an extension through May 4, 2020, with no additional advances from the Bank Group, so that the Debtors could finalize its engagement with SSG and prepare and present to the Bank Group the Debtors’ plan, on a going forward basis, to obtain a new asset based lending facility to replace the Bank Group’s facility.
By April 29, 2020 it had become apparent to the Debtors that an agreement could not be reached with the Bank Group. Without a binding Forbearance Agreement in place, placing the Debtors at risk of having the Banks exercising their remedies, the Debtors believed they had no choice but to file these chapter 11 cases in order to preserve the value of their businesses as a going concern.
Other factors contributing to the chapter 11 filings include a downturn in sales due to a more general change in the business environment, insolvency of a number of the 10 major trading partners, and the decision of many of Rubie’s licensors to grant non-exclusive licenses thereby allowing a multitude of other manufacturers/wholesalers to obtain licenses for certain popular designs and images."
The Debtors are party to an October 2018 credit agreement (the “Credit Agreement”) with a bank group consisting of Bank of America, NA, Wells Fargo Bank, NA, JP Morgan Chase Bank, NA, TD Bank, NA, Citibank, NA, and HSBC Bank, USA, NA (the “Bank Group”) with HSBC serving as Administrative Agent. The Credit Agreement initially provided for lending facilities of $150.0mn in the aggregate. As at the Petition date, $46.7mn was owed to the Bank Group ($35.0mn of loans and $11.7mn letters of credit).
About the Debtors
According to the Debtors: "Family owned and operated for over 65 years, Rubie’s Costume Company is the largest designer, manufacturer and distributor of Halloween costumes and accessories in the world! We remain true to our founders’ vision by continually offering innovative products and a variety of styles for the whole family to enjoy, including pets! With the 3rd generation playing such an integral role in our future, we’re confident Halloween with Rubie’s will continue to flourish for years to come.
The Beige Declaration adds: :Rubie’s, a New York corporation, is a designer, manufacturer and distributor of costumes and related accessories with a wide ranging portfolio of non-exclusive licenses including, but not limited to: Marvel, Warner Brothers, Nickelodeon, Disney and Lucasfilm. Historically, the Company’s growth has been through sales of products with designs driven by the strength of these non-exclusive third-party licensing agreements, as well as rising interest among both adults and children in dressing up as authentic movie and television characters.
The remaining Debtors are each in the costume and party supply industry, as set forth in more detail below. 4.Rubie’s operates or contracts with manufacturing facilities throughout the world and has worldwide wholesale distribution of its products. It often licenses widely recognized designs from leading worldwide content providers such as Warner Brothers, Disney, and Marvel and currently maintains approximately 75 licenses in the United States. 5.Rubie’s is part of a corporate structure consisting of approximately twenty-eight companies and entities that are referred to herein collectively as the “Rubie’s Group.”"
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