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November 18, 2020 – The Debtors filed solicitation versions of their Revised Second Amended Plan of Reorganization and a related Disclosure Statement [Docket Nos. 1633 and 1634, respectively]; and separately filed redlines of each showing generally light changes to the versions filed on November 15, 2020 [Docket No. 1630].
Also on November 18th, the Court hearing the Tuesday Morning Corporation cases approved (i) the adequacy of the Debtors’ Disclosure Statement, (ii) Plan solicitation and voting procedures and (iii) a timetable culminating in a December 22, 2020 Plan confirmation hearing [Docket No. 1640].
One set of changes reflected in the solicitation documents, relate to a late objection raised by Debtors' Official Committee of Unsecured Creditors (the “Creditors’ Committee”) and responded to by the Debtors' Official Committee of Equity Security Holders (the "Equity Committee") relating to the treatment of the 100% ($125.0mn) recovery for general unsecured creditors in Class 5.
In that objection, now withdrawn, the Creditors' Committee had argued that the $125.0mn should be placed in a trust upon Plan effectiveness and that unsecured creditors should receive contractually agreed interest (or as a fallback interest based on state judgment rates) for the period from Plan filing through to when general unsecureds are otherwise paid in full [Docket No. 1589]. As discussed below, the Equity Committee found the ask (and its presentation) a bit precious; but in the end the Creditors' Committee appears to have gotten the trust it wanted and has settled for the application of the 0.16% Federal Judgment Rate in place of either contractually agreed rates or state judgment rates. In any event, both parties have attached letters in support of the Plan to the Debtors' solicitation materials.
The Disclosure Statement [Docket No. 1634] notes, “Distributions under the Plan shall be made with: (1) Cash on hand, including Cash from operations; (2) the New ABL Credit Facility; (3) the New Real Estate Credit Facility; (4) the issuance of the General Unsecured Bonds; and (5) Reinstatement of the Tuesday Morning Corporation Interests, as applicable.”
The amended Disclosure Statement adds: “The following is a nonexclusive list of certain key terms in the Plan:
- Payment in full (100%) of secured, administrative and priority claims;
- Payment in full (100%) plus interest in cash to all holders of Class 5 General Unsecured Claims;
- Conversion of Interests in Tuesday Morning into New Common Stock subject to dilution by the Rights Offerings and Management Incentive Plan.
The sources of funding for the Plan include:
- Cash on hand from operations;
- Projected sale proceeds of approximately $60 million from the Sale Leaseback of the Debtors’ owned real property;
- $25 million in proceeds from the Debtors’ issuance of the Senior Subordinated Notes to the Senior Subordinated Noteholders; and
- Projected proceeds of a $40 million Rights Offerings, which is fully backstopped by the Backstop Parties.
- Eligible Offerees (any holder of Existing Common Stock as of the Rights Offering Record Date) will be eligible to participate in the Eligible Rights Offering Common Stock for an aggregate purchase price of up to $24,000,000, with the remaining $16,000,000 reserved for the Backstop Parties.
Upon emergence from bankruptcy, the Reorganized Debtors will have access to a $110 million senior secured New ABL Credit Facility offered by the Debtors’ DIP Revolving Facility Lenders. If the Plan is approved, the Reorganized Debtors will emerge from bankruptcy as reorganized, well-capitalized entities able to continue conducting business with their key merchandise partners, continue to employ thousands of employees and continue as tenant to hundreds of landlords.”
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 (“Other Priority Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $0 and expected recovery is 100%.
- Class 2 (“Other Secured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $200k and expected recovery is 100%. Each holder of an Other Secured Claim shall receive: (i) Payment in full in Cash; (ii) The collateral securing its Class 2 Claim; provided, however, any collateral remaining after satisfaction of such Claim shall revest in the applicable Reorganized Debtor pursuant to the Plan; or (iii) Reinstatement of its Class 2 Claim.
- Class 3 (“Secured Tax Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $0 (Tax claims are generally being paid in the ordinary course of business) and expected recovery is 100%. Each holder shall receive: (i) Payment in full in Cash; (ii) the collateral securing its Claim; provided, however, any collateral remaining after satisfaction of such Class 3 Claim shall revest in the applicable Reorganized Debtor; or (iii) Such other treatment consistent with the requirements of Bankruptcy Code.
- Class 4 (“Existing First Lien Credit Facility Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $100k and expected recovery is 100%. Each holder shall receive Payment in Full, in Cash, plus any and all fees, interest (both pre and post-Petition date) and reimbursement of expenses and any other amounts owed or arising under the Existing First Lien Credit Documents through the time of Payment in Full, in three equal installments to be paid on the 30th, 60th and 90th days after the Effective Date (each a “Payment Date”). All liens and security interests granted to secure such Existing First Lien Credit Facility Claims shall be retained until such payments shall have been made. Further, in the event that the Existing First Lien Agent is the agent for the New ABL Credit Facility, it shall retain the liens and security interests securing the Existing First Lien Credit Facility Claims after such payments are made and have such liens and security interests secure the New ABL Credit Facility.
- Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $125.0mn and expected recovery is 100%. Each holder of a Class 5 Claim shall receive its Pro Rata share of (i) the General Unsecured Cash Fund with interest from the Petition Date through the payment date at the federal judgment rate in effect as of the Petition Date.
- Class 6 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Class 6 Claims shall be, at the option of the Debtors, either Reinstated or cancelled and released without any distribution.
- Class 7 (“Tuesday Morning Interests”) is impaired and entitled to vote on the Plan. Each outstanding share of the Existing Common Stock shall remain outstanding. On the Rights Offering Distribution Date, each share of the Existing Common Stock outstanding on the Rights Offering Record Date shall be exchanged for (1) one share of the New Common Stock and (2) a Share Purchase Right entitling the holder to purchase a pro rata portion of the Eligible Holders Rights Offering Common Stock. On the Effective Date, Tuesday Morning Corporation Interests consisting of options, warrants or other rights, contractual or otherwise, to acquire shares of the Existing Common Stock shall be reinstated and entitle the holder to acquire an equal number of shares of the common stock of Reorganized Tuesday Morning, subject to dilution as a result of the issuance of the Rights Offering Common Stock and the issuance of equity securities on and after the Effective Date pursuant to the Management Incentive Plan.
- Class 8 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Voting Deadline: December 16, 2020
- Voting Objection: December 16, 2020
- Objections Deadline: December 16, 2020
- Confirmation Hearing: December 22, 2020
The following documents are attached to the Disclosure Statement [Docket No. 1634]:
- Exhibit 1: Plan
- Exhibit 2: Liquidation Analysis
- Exhibit 3: Financial Projections
- Exhibit 4: Terms of the New ABL Credit Facility
- Exhibit 5: Backstop Agreement
Creditors' Committee Objection and Equity Committee Response
[As previously reported] November 16, 2020 – The Official Committee of Unsecured Creditors (the “Creditors’ Committee”) objected to the Debtors’ Disclosure Statement arguing that the projected 100% ($125.0mn) recovery for general unsecured creditors in Class 5 should be placed in trust upon Plan effectiveness and that unsecured creditors should receive contractually agreed interest through to the point when there claims are otherwise paid in full [Docket No. 1589].
The Debtors' Official Committee of Equity Security Holders (the "Equity Committee") has filed a response in support of the Disclosure Statement, arguing that the Creditors' Committee gives itself rather too much credit with its "revisionist history" and that it is equity holders who have otherwise stepped up to the plate to backstop a $40.0mn rights offering that will provide unsecured creditors with their 100% recovery. The Creditors' Committee, the Equity Committee suggests, might express a bit of gratitude as opposed to patting itself on the back; the "complaining" Creditors' Committee only weeks age championing a significantly inferior Plan based on a proposed sale that resulted in a "roughly 70% recovery to the unsecured creditors and no recovery to equity."
The Creditors’ Committee objection reads: “The Creditors’ Committee objects to Debtors’ Disclosure Statement as it and the Plan fail to provide for the General Unsecured Funds (in an amount sufficient to cover all estimated unsecured claims (plus applicable interest) to be immediately placed into and held in trust for the sole benefit of the General Unsecured Creditors. While the Disclosure Statement and Plan provide for payment in full to the General Unsecured Creditors, neither provides that such funds will be held in trust. While the Creditors’ Committee appreciates the promise of payment in full, ultimately it is just a promise if the Plan documents do not require that such funds be held in trust. The General Unsecured Creditors should not be asked to vote on a plan, let alone accept a plan, that merely promises to pay them in full, but yet fails to put the approximately $125 million of funds required to pay them in a trust solely for their benefit. 21.There is no legitimate reason for the Debtors to refuse to immediately put that $125 million into a trust for the sole and exclusive benefit of the General Unsecured Creditors, particularly when their Plan affirmatively provides for an immediate recovery for the benefit of the subordinate class of equity security holders.
The Creditors’ Committee’s actions have resulted in a vastly improved plan from the previous versions, which based on the Committee’s estimates, increased the cash component to unsecured creditors under each plan from approximately 60% to 80% to 100%. Put another way, the plan has morphed from a version with unsecured creditors receiving potentially unsecured notes as high as $75 million to the current version where unsecured creditors will be paid in cash, in full, with interest. And the Creditors’ Committee believes the process is not yet complete."
The Equity Committee responds [Docket No. 1598]: "After discussions with the Debtors and the Equity Committee, and after a thorough bid process involving multiple competing plan sponsors conducted around-the-clock over the past week, the Debtors and the Equity Committee selected a transaction with Osmium and Tensile that will provide for the following: (i) a 100% recovery to all Class 5 General Unsecured Claims to be paid in a lump sum payment in cash with interest; and (ii) recovery to equity interest holders as set forth in the Plan. In addition, the Plan features significant improvements to the go-forward corporate governance for the Debtors, such as four (4) new Board of Directors members and pre-set triggers to additional direct shareholder representation if certain performance fails to meet expectations.
Contrary to the Creditors’ Committee’s revisionist history in the UCC Objection, the Plan and Disclosure Statement are the result of the Equity Committee’s and Debtors’ extraordinarily successful efforts.
While the Creditors’ Committee was pushing a sale process that would have resulted in a maximum 70% recovery to General Unsecured Claims, the Equity Committee and the Debtors were seeking a value-maximizing transaction that would pay all creditors in full and reinstate equity on favorable terms. As evidenced by the Plan that provides a 100% recovery to General Unsecured Claims, the Equity Committee and the Debtors were right.
Despite the fact that its constituency is slated to be paid in full, in cash, with interest, the Creditors’ Committee still finds grounds to complain. First, the Creditors’ Committee demands that the General Unsecured Funds be immediately placed in trust for the benefit of General Unsecured Creditors, which trust will be responsible for reconciling and objecting to general unsecured claims. Aside from the fact that there is no statutory requirement that the General Unsecured Funds must be placed into trust, doing so here amounts to the 'fox guarding the henhouse,' as the Creditors’ Committee has no incentive to reconcile and object to general unsecured claims since such claims are being paid in full. Indeed, they have a disincentive to reconcile claims as they will look better to their constituency if they look the other way in reconciling claims.
Second, the Creditors’ Committee raises issues concerning the interest rate and amount to be paid to General Unsecured Creditors. The Equity Committee disagrees with the Creditors’ Committee that General Unsecured Creditors should be paid default interest at the contract rate through the payment date. This is a plan confirmation issue and need not be considered in connection with the Disclosure Statement."
Liquidation Analysis (See Exhibit 2 of Disclosure Statement for notes [Docket No. 1578])
About the Debtors
Tuesday Morning Corporation (NASDAQ: TUES) 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 at filing operated 687 stores in 39 states.
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