Tuesday Morning Corporation – Stronger than Expected Revenues Lead to DIP Bidding War; With Debtors Slashing Borrowing Costs on (Now Approved) $25mn Supplemental DIP Facility

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July 10, 2020 – The Court hearing the Tuesday Morning Corporation cases issued a final order authorizing the Debtors to access $25.0mn of debtor-in-possession (“DIP”) financing to be provided by Franchise Group, Inc. (“FGI”). This has been something of a wild ride, with the Debtors twice switching providers of this DIP financing; for a month slated to be provided by B. Riley Financial ("BRF," a wholly owned subsidiary of B. Riley Financial, Inc. or "B. Riley") and then briefly by SF V CLE Lending, LLC (“SF V”)…and thats before we factor in that this has been from the outset financing supplemental to the Debtors' "Initial DIP Financing" of $50.0mn.

By way of reminder, the Debtors' ability to obtain at least $20.0mn of additional DIP financing was required of the Debtors by their existing DIP lenders (prepetition term loan lenders led by JPMorgan Chase Bank, N.A. as agent); with failure to do so within 30 days of the Petition date an event of default in respect of the earlier financing (the "Initial DIP Financing") and triggering a “Full-Chain Liquidation,” i.e. “a sale of all or substantially all of the Debtors’ assets through an orderly liquidation of the Debtors entire chain of stores…”

For the Debtors, the scramble (and then scramble again) has been worth it; with the terms of the financing dramatically better. The interest rate dropping from the LIBOR plus 9% offered by BRF to LIBOR plus 5% and the combined up front and exit fees slashed from 5% (again BRF) to just 1.5%.

How/why did this happen? Mostly because the Debtors underlying prospects seem to have improved, enough so that the Debtors received "a competing proposal" in Mid-June…and then…another one. The Debtors provide [Docket No. 307]: "Due to stronger than expected sales revenue, the Debtors’ liquidity is greater than originally anticipated. As a result the Debtors have agreed to the Committee’s request to postpone consideration of the relief sought in the Amended Motion to July 8, 2020 (the “July 8 Hearing”). To further accommodate the July 8 Hearing date, the DIP ABL Agent has also agreed to an extension of the milestone in the DIP ABL Credit Agreement otherwise requiring the Debtors to obtain additional DIP financing secured by the Debtors’ unencumbered real estate assets within forty (40) days of the Petition Date. In light of the additional notice to be provided to parties-in-interest in advance of the July 8 Hearing, the Debtors will seek final, rather than interim, approval of the Amended Motion at the July 8 Hearing. The Debtors have received a competing proposal to provide DIP financing secured by the Debtors’ Real Estate Assets and as a result the Debtors will invite BRF Finance Co., LLC ('BRF'), and the competing lender (the 'Competing Lender') to each provide its best and final offer on or before 12 p.m. Central Time on July 2, 2020 (the 'July 2 Deadline') to counsel to the Debtors, counsel to the DIP ABL Agent, and counsel to the Committee."

The Debtors' July 8th motion [Docket no. 407] continues the story : “On June 23, 2020, the Debtors filed their Debtors’ Amended Motion….Through the DIP Term Motion and Amended DIP Term Motion the Debtors requested authorization to obtain DIP financing from BRF Finance Co., LLC ('BRF'). The Amended DIP Term Motion provided that in the event the Debtors received a proposal that in their business judgment is superior to the proposal described in the DIP Term Motion (a 'Superior Proposal'), the Debtors would supplement the Amended DIP Term Motion by filing (i) a revised summary of the table of material terms together with a redline showing changes against the summary of material terms contained herein, (ii) a revised draft of the DIP Term Credit Agreement incorporating the terms of the Superior Proposal, and (iii) a draft of the form of proposed final order incorporated in the Superior Proposal with a redline against the Interim Order.

The Debtors received timely binding competing proposals to provide DIP financing secured by the Debtors’ Real Estate Assets from (a) SF V CLE Lending, LLC (“SF V”) and (b) Franchise Group, Inc. (“FGI”). After careful review and consideration, the Debtors, with the help of their professionals, determined that the proposal received by SF V CLE Lending, LLC (“SF V”) constituted a Superior Proposal to provide debtor-in-possession financing (the “SF V DIP Proposal”). 

On July 7, 2020, the Debtors received a subsequent binding competing proposal from FGI (the “FGI DIP Proposal”) to provide DIP financing secured by the Real Estate Assets (the “FGI DIP Term Facility”). After careful review and consideration, the Debtors, with the help of their professionals, determined that the terms of the FGI DIP Proposal were materially better than the terms of the SF V DIP Proposal. Specifically, through the FGI DIP Proposal, FGI agreed to (a) adopt all non-economic terms of the SF V DIP Proposal and confirmed its willingness to execute agreements consistent with the SF V proposed transaction documents filed with the First DIP Term Supplement, (b) provide an interest rate of LIBOR +5.00% as opposed to the LIBOR +6.49% rate in the SF V DIP Proposal, (c) reduce each of the upfront fee and exit fee to 0.75% as opposed to the 1.00% upfront fee and 1.30% exit fee incorporated in the SF V DIP Proposal, (d) match the SF V DIP Proposal’s 0.65% extension fee in connection with an April 2021 maturity, (e) reduce the extension fee in connection with a January 2021 maturity to 0.70% as compared to the SF V DIP Proposal’s 1.25% extension fee in connection with a January 2021 maturity. 

Although the FGI DIP Proposal was received after the July 2, 2020 deadline described in the Amended DIP Term Motion, the Debtors determined that, in furtherance of their fiduciary duties, because the FGI DIP Proposal constitutes a binding proposal with materially better terms than the terms of the SF V DIP Proposal, the Debtors should accept FGI DIP Proposal. Prior to accepting the FGI DIP Proposal, the Debtors contacted SF V to inform them of the FGI DIP Proposal and to extend SF V the opportunity to provide the Debtors with an updated proposal matching or improving the terms of the FGI DIP Proposal. SF V declined to either match or improve the terms of the FGI DIP Proposal."

Prepetition Indebtedness

The Debtors are party to an August 2015 credit agreement (the “Prepetition Credit Agreement”), with JPMorgan Chase Bank, N.A. (“JPM”) as administrative agent; and JPM, Bank of America, N.A., and Wells Fargo Bank, N.A. as lenders.

The Prepetition Credit Agreement initially provided for a senior secured asset based revolving credit facility in an amount up to $180.0mn and as of the Petition date, total funded obligations under the Prepetition Revolving Credit Facility totaled $47,947,700 including $8,823,449 in letters of credit.

As a result of a COVID-19 driven decision to close their stores, the Debtors breached a provision in Prepetition Credit Agreement prohibiting the Debtors from “suspend[ing] the operation of its business in the ordinary course of business.” The Debtors, ultimately entered into a forbearance agreement in respect of the resulting default; terms of which included, inter alia, a permanent reduction of commitments from $180.0mn to $130.0mn million and required certain additional prepetition payments.

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 currently operates 687 stores in 39 states.

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