Serta Simmons Bedding, LLC – Leading “Sleep Company” Files for Bankruptcy on “Pre-Arranged” Basis with $1.9bn of Funded Debt and $150.0mn in Trade Debt. RSA Has $1.6bn of Funded Debt Equitized; Eclipse Business Capital to Provide $125 of DIP Financing

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January 23, 2023 – Serta Simmons Bedding, LLC and 13 affiliate debtors (“SSB“ or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 23-90020 (Judge David R. Jones). The Doraville, Georgia based Debtors, “one of the leading global sleep companies,” are represented by Gabriel A. Morgan of Weil, Gotshal & Manges LLP. Further board-authorized engagements include: (i) FTI Consulting, Inc. as financial advisors, (ii) Evercore Group L.L.C. as investment bankers, (iii) PricewaterhouseCoopers LLP as tax and audit consultant and (iv) Epiq Corporate Restructuring as claims agent. 

Additional engagements include Gibson Dunn & Crutcher, LLP as legal counsel to the consenting creditors and Centerview Partners LLC as investment banker to the consenting creditors. Ropes and Gray LLP is serving as legal counsel to Advent International Corporation ("Advent").

The Debtors’ lead petition notes between 25,000 and 50,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn ($1.9bn of Funded Debt). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Leggett & Platt ($17.4mn trade claim), (ii) Ergomotion ($8.0mn trade claim) and (iii) FXI ($7.0mn trade claim). All 30 of the Debtors' top 30 unsecured creditors are trade vendors and each has a claim in excess of $800k.

In October 2012, private equity house Advent acquired a controlling interest (now 60%) in the Debtors for an undisclosed amount (rumors were @3.0bn) from Ares Management LLC ("Ares") and the Ontario Teachers’ Pension Plan ("OTPP"), with these two funds remaining as minority shareholders.

In June 2020, Apollo Capital Management (having reportedly bought $600.0mn of deeply discounted first lien loans), Angelo Gordon & Co. and Gamut Capital Management LP sued Advent, seeking to "block a transaction the company is pursuing with a group of mutual-fund managers who hold a larger block of Serta’s debt." That legal challenge was successfully rebuffed at the time, at least to the extent it looked to enjoin the Debtors from proceeding with the restructuring proposal championed by Eaton Vance, but as described further has not been resolved in the two and half years since.

Highlights

  • Mattress Leader (controlled by PE House Advent International) files for Bankruptcy on "Pre-Arranged" Basis with $1.9bn of Funded Debt
  • Debtors Cite Litigation Related to 2020 Restructuring, Looming 2023 Debt Maturities (Compounding Unsustainable Debt Generally), "Downturn of the Mattress Industry" and Macro-Economic Trends (eg Inflation, COVID, Supply Chain Issues)
  • Debtors to Initiate Adversary Proceeding Seeking "Declaratory Judgment that the 2020 [Restructuring] Transaction was Valid"
  • Restructuring Support Agreement has 81% and 77% Support Levels for First and Second Lien Lenders, Respectively
  • RSA has $1.59bn of Debt Equitized
  • Eclipse Business Capital LLC to Provide $125.0mn DIP Financing Faciliy which Converts to Exit Financing
  • Top 30 Unsecured Trade Creditors Owed @$85.0mn; Total for Unsecured Creditors $150.0mn

Press Release

In a press release announcing the filing, the Debtors advised that: “SSB has entered into a Restructuring Support Agreement with key financial stakeholders that will significantly reduce the company’s debt and enable the company to continue making critical investments in its business and brands. To implement the restructuring contemplated by the agreement, most of SSB’s U.S. corporate entities have initiated a voluntary pre-arranged court-supervised process under Chapter 11 of the U.S. Bankruptcy Code.

Today’s filings do not include SSB’s Canadian or Puerto Rican operations.

The restructuring will substantially reduce the company’s funded debt from approximately $1.9 billion to approximately $300 million and enable the company to continue making critical investments in its business and brands. The company has received a commitment for a $125 million exit ABL Credit Facility available upon SSB’s emergence from Chapter 11."

Shelley Huff, the Debtors' CEO, added: “With the support of key financial stakeholders, we are taking steps to strengthen our financial position. After the conclusion of this process, we will have a stronger financial foundation to drive profitable growth and continue delivering the high-quality, innovative products that our company is known for. Looking ahead, we will remain focused on launching new innovations, further building a high-performing and resilient supply chain and expanding the commercial side of our business to meet demand for our trusted brands and products.”

Restructuring Support Agreement

The Restructuring Support Agreement (attached as Exhibit B to Docket No. 29) has been agreed to by approximately 81% of the company’s first lien, first out priority term loan lenders and approximately 77% of its first lien, second out priority term loan lenders (collectively, the “consenting creditors”), as well as a majority of SSB’s existing equity holders (the “consenting equity” [ie Advent]).

Plan Overview

As set forth in greater detail in the Plan, the Restructuring provides that:

  1. each holder of an Allowed FLFO Claim (as defined in the Plan) under the PTL Facility has agreed to exchange its claims for its pro rata share of $195,000,000 in aggregate principal amount of New Term Loans;
  2. each holder of an Allowed FLSO Claim (as defined in the Plan) under the PTL Facility has agreed to exchange its claims for its pro rata share of (x) one hundred percent (100%) of the equity in the Reorganized Debtors (less any such equity distributed to holders of Class 5 Non-PTL Claims (defined below) and subject to dilution by equity distributed pursuant to the Management Incentive Plan), and (ii) $105,000,000 in aggregate principal amount of takeback debt in the form of the New Term Loans;
  3. each holder of an Allowed Non-PTL Term Loan Claim will receive: (i). If Class 5 votes to accept the Plan: Its Pro Rata Share of 4% of New Common Interests issued on the Effective Date, subject to dilution by the New Common Interests distributed pursuant to the Management Incentive Plan; (ii). If Class 5 votes to reject the Plan: Its Pro Rata Share of 1% of New Common Interests issued on the Plan Effective Date, subject to dilution by the New Common Interests distributed pursuant to the Management Incentive Plan; 
  4. each holder of an Allowed Ongoing General Unsecured Claim shall receive, in exchange for executing a trade agreement providing for the continuation of goods or services on the same or better terms as existed prior to the Petition Date, no more than four (4) Cash installments, which payments shall result in full payment in the Allowed amount of such Ongoing General Unsecured Claim on no better terms than payment in the ordinary course of business;
  5. each holder of an Allowed Other General Unsecured Claim shall receive, in full and final satisfaction of such Claim, its Pro Rata Share of the Other General Unsecured Claims Recovery Pool as set forth in the GUC Recovery Allocation Table [NOT YET PROVIDED]; and
  6. a settlement shall be approved among the Debtors, the Consenting Creditors, and the Consenting Equity Holders resulting in the contribution of non-Debtor entity Dawn Holdings, Inc. into the restructuring.

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

  • Class 1 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
  • Class 2 (“Priority Non-Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 3 (“FLFO Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $195,000,000 and the estimated recovery is 100%. Each Holder will receive such holder’s Pro Rata share of $195 million in aggregate principal amount of New Term Loans.
  • Class 4 (“FLSO Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is no less than $832,012,999 and the estimated recovery is [●]%. Each Holder will receive such holder’s Pro Rata share of (i) 100% of the New Common Interests issued on the Effective Date, less any New Common Interests distributed to holders of Class 5 Non-PTL Claims under the Plan and subject to dilution by the New Common Interests distributed pursuant to the Management Incentive Plan, and (ii) $105 million in aggregate principal amount of New Term Loans.
  • Class 5 (“Non-PTL Term Loan Claims”) is impaired and entitled to vote on the Plan. Each Holder will receive: 
    1. If Class 5 votes to accept the Plan: Its Pro Rata share of 4% of New Common Interests issued on the Effective Date, subject to dilution by the New Common Interests distributed pursuant to the Management Incentive Plan. 
    2. If Class 5 votes to reject the Plan: Its Pro Rata share of 1% of New Common Interests issued on the Effective Date, subject to dilution by the New Common Interests distributed pursuant to the Management Incentive Plan.
  • Class 6A (“Ongoing General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is 100%. Each Holder will receive no more than four Cash installments, resulting in full payment in the Allowed amount of such Ongoing General Unsecured Claim on no better terms than payment in the ordinary course of business.
  • Class 6B (“Other General Unsecured Claims”) is impaired and entitled to vote on the Plan. The estimated recovery is 100%. Each Holder will receive its Pro Rata Share of the Other General Unsecured Claims Recovery Pool as set forth in the GUC Recovery Allocation Table.
  • Class 7 (“Intercompany Claims”) is unimpaired/impaired, presumed to accept/ deemed to reject and not entitled to vote on the Plan. 
  • Class 8 (“Intercompany Interests”) is unimpaired/impaired, presumed to accept/ deemed to reject and not entitled to vote on the Plan. 
  • Class 9 (“Other Intercompany Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. 
  • Class 10 (“Intermediate Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.

Key Documents

The Disclosure Statement [Docket No. 29] attaches the following exhibits:

  • Exhibit A: Plan of Reorganization
  • Exhibit B: Restructuring Support Agreement
  • Exhibit C: New Term Loan Credit Facility Agreement Term Sheet
  • Exhibit D: Organizational Chart
  • Exhibit E: Liquidation Analysis (Omitted)
  • Exhibit F: Valuation (Omitted)
  • Exhibit G: Release Provisions
  • Exhibit H: Financial Projections (Omitted)
  • Exhibit I: Voting Procedures and Requirements (Omitted)

Under the Plan, the Debtors will also enter into (a) a new term loan credit facility in the aggregate principal amount of $300,000,000.00 (plus original issue discount), and (b) a first lien asset-backed revolving credit facility, which, as of the Effective Date, will roll up or replace the DIP Facility, to provide the Company with working capital to fund its business postemergence.

The effects of the Restructuring can be summarized as follows (NB: New Term Loan amount shown excludes original issue discount. Exit ABL Facility will be subject to a minimum draw to be determined. Excludes capital lease obligations):

DIP Financing

The Debtors have obtained debtor-in-possession ("DIP") financing commitments from lenders led by Eclipse Business Capital LLC ("Eclipse") as agent in the form of a $125.0mn ABL Credit Facility (inclusive of a $10.0mn letters of credit facility). The DIP will augment the Debtors' "approximately $170 million of cash on hand as of the filing date, and cash generated from the company’s ongoing operations," to "support the business during the court-supervised process." The DIP financing will roll into exit financing of an equal amount with Eclipse continuing as agent.

Prepetition Capital Structure

As of the Petition date, the Debtors owe approximately $150.0mn in respect of trade debt and other potential liabilities. The Debtors consider $30.0mn of these non-vital.

Prepetition Shareholdings

Advent owns approximately 60% of the equity interests in Dawn Holdings, Inc., the Debtors’ ultimate parent. The remaining equity is owned by, among other holders, Ares, OTPP, certain current and former employees and directors of the Company, and the founders and other prior owners of Tuft & Needle.

Events Leading to the Chapter 11 Filing

In a declaration in support of first day filings (the “Linker Declaration”) [Docket No.], John Linker, the Debtor’s CFO provides: “In addition to its looming maturities and unsustainable capital structure, the Debtors face financial challenges as a result of the downturn of the mattress industry generally.
The U.S. bedding industry has been subject to significant disruptions recently, including a decline in industry demand beginning in 2022 as a result of slower economic growth caused by recent geopolitical and macroeconomic uncertainty, as well as reduced consumer spending as a result of higher interest rates. Prior to the demand headwinds, the industry faced significant inflation in raw materials costs, supply chain disruptions, and the adverse market effects created by the COVID-19 pandemic. While the fundamentals of the Debtors’ business remain strong, the Debtors are facing significant debt maturities in 2023.

…the Restructuring is the culmination of a years-long effort on the part of the Debtors to right-size their balance sheet. Since 2019, in conjunction with operational initiatives designed to grow its sales, the Company has been seeking a transaction that would reduce its debt and provide the working capital necessary to carry out its long term plans. As for many companies, the onset of the COVID-19 pandemic put significant pressure on this process and the Company’s business at large, threatening to derail its efforts. In response to these challenges, in June 2020, the Company closed a recapitalization transaction with certain of its existing secured lenders. Referred to herein as the “2020 Transaction,” upon closing, the Company received an infusion of $200 million in new money through a new, super-priority PTL Facility, which allowed the Company to weather the economic downturn.

However, I understand that the various macroeconomic and operational headwinds the Debtors continued to face, along with the Debtors’ leverage profile, remained a hindrance to long term healthy growth. In addition, certain of the Company’s existing lenders that were not party to the 2020 Transaction have sued the Company and certain of the PTL Lenders (referred to collectively herein as the “2020 Transaction Litigation”), two of which are currently pending. In one action, pending in the United States District Court for the Southern District of New York, plaintiffs seek damages for alleged breaches of the Non-PTL Term Loan Agreement and the implied covenant of good faith and fair dealing, among other causes of action. In the second, pending in New York State Supreme Court, plaintiffs likewise seek damages for alleged breach of the Non-PTL Term Loan Agreement and the implied covenant of good faith and fair dealing, and additionally seeks to unwind the 2020 Transaction entirely

Under threat from the 2020 Transaction Litigation, and with significant maturities looming in 2023, the Company redoubled its efforts to find a strategic partner, including engagement with plaintiffs in the state court action to attempt to negotiate the terms of a settlement. While settlement discussions were ultimately unsuccessful, in January 2023, the Company and the PTL Lenders reached agreement with respect to the terms of a recapitalization transaction, culminating in the Restructuring Support Agreement and the Plan.

The Company’s ability to restructure its balance sheet and emerge from chapter 11 is inextricably tied to the resolution of the disputes raised in the 2020 Transaction Litigation. Accordingly, contemporaneously with the filing of the petitions, the Debtors are initiating an adversary proceeding (the 'Adversary Proceeding') to comprehensively resolve the claims against the Debtors—and by extension, the PTL Lenders—arising from the 2020 Transaction Litigation and any future litigation related to the 2020 Transaction. The Adversary Proceeding seeks a declaratory judgment that the 2020 Transaction was valid under the terms of the Non-PTL Term Loan Agreement…"

About the Debtors

According to the Debtors: “Serta Simmons Bedding (SSB) is one of the leading global sleep companies. With a 150-year heritage in delivering industry-leading sleep solutions and a mission to help people sleep better so they can live healthier lives, the company is headquartered in Doraville, GA, and owns top brands such as Serta®, which has five other independent licensees, Beautyrest®, Tuft & Needle® and Simmons®.”

The Linker Declaration adds: "The Debtors manufacture, sell and distribute their bedding products to individual consumers through a number of channels. The Debtors primarily sell their products in the United States through dealers which, in 2022, included approximately 2,200 authorized independent retailers,
including one or more mattress specialty stores, as well as furniture stores, department stores, furniture rental stores, mass merchandisers, and juvenile specialty stores. The Debtors also sell their products (i) to hospitality customers, such as hotels, casinos and resort properties, through SSB Hospitality, LLC; (ii) to third party resellers, who purchase overstock and discontinued models through four (4) warehouses operated by World of Sleep Outlets, LLC; and (iii) directly to consumers through their e-commerce platforms and retail stores. The Debtors also license their intellectual property for use by third party manufacturers of bedding products."

Corporate Structure Chart

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