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February 23, 2023 – Following a continued first day hearing, the Court hearing the Tuesday Morning Corporation cases issued an interim order (i) approving a proposed procedures for store closing sale and (ii) adopting proposed sale guidelines [Docket No. 250].
Unusually, the Debtors will be embarking on the store closing process without a store closing consultant, with the Debtors noting in their requesting motion that they were "capable of continuing and completing the Sales and Store Closings without the assistance, and without the significant expense, of a liquidation consultant."
Gordon Brothers had been slated to fill that role, as required by proposed debtor-in-possession ("DIP") financing offered by prepetition lenders, but "since the Debtors found alternative, more favorable DIP financing, the Debtors have filed a motion seeking to reject such agreement as an exercise of their sound business judgment."
The Debtors had been looking to have their contract with Gordon Brothers rejected on an emergency basis, but following a February 16th hearing at which Judge E. Lee Morris made it very clear that Gordon Brothers had no Court-sanctioned role in the store closing process ("was not remotely in the mix"), and hence could not, as the Debtors had worried in their emergency motion, create havoc at their closing stores.
At that hearing, counsel for the Debtors had shared with the Court that Gordon Brothers planned to dump $67.0mn of "augmented" merchandise at the Debtors' stores…that "trucks could show up" and that it would be "incredibly disruptive to have to address those trucks."
In dismissing the emergency motion as un-necessary, Judge Morris made it very clear that efforts by Gordon Brothers to insert itself into the Debtors' affairs without Court authority would be "a pretty serious issue with respect of automatic stay" (that automatic stay applicable to Gordon Brothers as a prepetition contractual counterparty).
Rejection of the Gordon Brothers contract is now to be considered at a March 21st hearing, with the issue perhaps not dispositively resolved. Prepetition lender Tensile, whose collateral is set to be sold in any sale, made it clear that it would prefer to have Gordon Brothers running the show. Comments by Debtors' counsel also suggested that perhaps economics had as much to do with the Debtors' decision to reject Gordon Brothers (and its truckloads of augmented merchandise); with the Debtors unhappy with their cut of the proceeds as that reported $67.0mn of goods.
The Debtors, retailers of discounted merchandise by nature, probably do not have any philosophical objection to taking in Gordon Brothers' flood of discounted goods. They do, however, want to move as quickly as possible to get stores closed and premises returned to landlords, with extra merchandise slowing down that process. A larger cut as to augmented merchandise could alter the Debtors' assesment of the relative balance of (cost-reducing) speed as against augemented sale proceeds.
On February 14, 2023, Tuesday Morning Corporation and six affiliated Debtors (“Tuesday Morning” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn.
In a press release announcing the filing, Tuesday Morning notes that: "it is pursuing a financial and operational reorganization to enable the Company to reduce its outstanding liabilities, obtain significant and necessary capital, and ultimately transform into a nimbler retailer that serves heritage markets in a profitable manner….The Company has also obtained a commitment from Invictus to provide $51.5 million of debtor-in-possession ('DIP') financing to support ongoing operations during the proceedings. The DIP financing is subject to approval of the Bankruptcy Court.
During the restructuring process, Tuesday Morning plans to focus on optimizing its store footprint and focusing on its core and heritage markets. The Company intends to close stores in low-traffic regions while allocating the proper resources to remaining stores in high-traffic regions. The Company believes this targeted approach to winding down unprofitable and underperforming stores will position Tuesday Morning to emerge from bankruptcy with a profitable, cash-generating store fleet that serves its most engaged and loyal customers."
On February 16th, the Court hearing the Tuesday Morning cases issued an order authorizing the Debtors to: (i) access up to $15.0mn in new money, debtor-in-possession (“DIP”) financing on an interim basis, reduced from a requested $25.0mn, and (iii) use cash collateral [Docket No. 112, with the DIP Term Loan Agreement attached at Exhibit 1 and changes what is a heavily revised interim DIP order highlighted in a redline at Docket No. 105.1].
The DIP financing is to be agented by Cantor Fitzgerald Securities and backstopped by Invictus Special Situations Master I, L.P. ("Invictus"), with Invictus looking to entice involvement of prepetition lenders with a roll-up of prepetition debt on a 1.61 (new money) to 1.0 (roll up) basis (subject to caps). The $36.5mn balance of what is in total $51.5mn of requested new money DIP is to be made available upon issuance of a final DIP order (as would be any approval of the roll-up), with consideration of that order is now scheduled for March 2, 2023.
That last minute change in DIP lenders (and the Debtors' decision to embark on a store closing process without the assistance of a liquidation professional) drew a flurry of animated objections from Wells Fargo Bank, National Association (“Wells Fargo”) in its capacity as administrative agent and collateral agent under the Debtors' Prepetition ABL Credit Agreement, including an objection to the DIP financing which was subsequently joined by Tensile Capital Management LP ("Tensile") which claims to hold more than half of the term loans issued under the Debtors' Prepetition Tem Loan Agreement ($24.5mn outstanding as at filing).
The Store Closing Motion
The motion [Docket No. 15] states, “The Debtors have faced unprecedented challenges, including underperforming sales at their 464 retail locations (the ‘Stores’). To address these challenges, the Debtors’ management team, in the exercise of their sound business judgment and in consultation with their advisors, ultimately determined that immediate liquidation of the Company’s inventory at its underperforming store locations (the ‘Closing Stores’) under the supervision of the Bankruptcy Court is the best strategy to maximize value for the benefit of creditors. As such, the Debtors have determined, in their business judgment, that it is in the best interests of their estates, creditors, and all parties-in-interests to seek authority to close and wind down or conduct similar themed sales (the ‘Sales’) to conduct store closing sales at the Closing Stores (the ‘Store Closings’).
In conjunction with their analysis of the Stores’ performance, the Debtors also conducted a review and analysis of their inventory levels at the Closing Stores. Such inventory (the ‘Merchandise’) will be included in and sold as part of the Sales. The Debtors expect that the bulk of the Sales and the shuttering of the Closing Stores will take approximately 8 weeks to complete. Once the Sales and closings are complete, the Debtors intend to prepare those Closing Stores for turnover to the applicable landlords.
The Debtors have determined, in an exercise of their business judgment, that the Sales are necessary to maximize the value of the assets being sold. At this time the Debtors are capable of continuing and completing the Sales and Store Closings without the assistance, and without the significant expense, of a liquidation consultantFN2.
FN2: The prepetition lenders that provided the ABL DIP Proposal (as defined in the DIP motion) required that the Debtors negotiate and enter into a consultant agreement with Gordon Brothers. Since the Debtors found alternative, more favorable DIP financing, the Debtors have filed a motion seeking to reject such agreement as an exercise of their sound business judgment."
About the Debtors
According to the Debtors: “Tuesday Morning Corporation is one of the original off-price retailers specializing in name-brand, high-quality products for the home, including upscale home textiles, home furnishings, housewares, gourmet food, toys and seasonal décor, at prices generally below those found in boutique, specialty and department stores, catalogs and on-line retailers. Based in Dallas, Texas, the Company opened its first store in 1974 and currently operates 487 stores in 40 states."
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