Case Doc 16 Filed 04/18/16 Page 1 of 10 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE. Chapter 11

Transcription

1 Case Doc 16 Filed 04/18/16 Page 1 of 10 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE In re VESTIS RETAIL GROUP, LLC, et al., 1 Debtors. Chapter 11 Case No.: ( ) (Joint Administration Requested) DECLARATION OF ROBERT J. DUFFY IN SUPPORT OF (I) DEBTORS DIP FINANCING MOTION AND (II) DEBTORS EMERGENCY STORE CLOSING SALES MOTION I, Robert J. Duffy, declare as follows: 1. I am a Global Segment Leader with FTI Consulting, Inc. (together with its affiliates, its wholly-owned subsidiaries, and independent contractors, FTI ), serving as the Global Leader of FTI s Corporate Finance/Restructuring Segment. As of March 26, 2016 until the date hereof (the Petition Date ), I also served as the Chief Restructuring Officer ( CRO ) of Vestis Retail Group, LLC and each of its chapter 11 affiliates, the debtors and debtors in possession (collectively, the Debtors ) in the above-captioned chapter 11 cases (the Cases ). As of the Petition Date, I serve as co-cro of the Debtors, together with Mark Weinsten. I am authorized to execute this declaration (the Declaration ) on behalf of FTI and the Debtors. I am an individual over the age of 18. Unless otherwise stated in this Declaration, I have personal knowledge of the facts set forth herein, and if called upon to testify, I would testify competently to all of the facts set forth herein. 1 The Debtors and the last four digits of their respective federal taxpayer identification numbers are as follows: Vestis Retail Group, LLC (1295); Vestis Retail Financing, LLC (9362); EMS Operating Company, LLC (2061); Vestis IP Holdings, LLC (2459); Bob s Stores, LLC (4675); EMS Acquisition LLC (0322); Sport Chalet, LLC (0071); Sport Chalet Value Services, LLC (7320); and Sport Chalet Team Sales, LLC (8015). The Debtors executive headquarters are located at 160 Corporate Court, Meriden, CT

2 Case Doc 16 Filed 04/18/16 Page 2 of This Declaration is being submitted in connection with (1) the Debtors Motion for Entry of Interim and Final Orders Pursuant to 11 U.S.C. 105, 361, 362, 363, 364, and 507 and Fed. R. Bankr. P. 2002, 4001 and 9014 (i) Authorizing Debtors and Debtors in Possession to Obtain Postpetition Financing, (ii) Authorizing Use of Cash Collateral, (iii) Granting Liens and Super-Priority Claims, (iv) Granting Adequate Protection to Prepetition Secured Lenders, (v) Modifying the Automatic Stay; (vi) Scheduling a Final Hearing, and (vii) Granting Related Relief (the DIP Financing Motion ); and (2) the Debtors Emergency Motion for Interim and Final Orders (i) Authorizing the Continuation of Store Closing Sales in Accordance with the Disposition Agreement and Sale Guidelines, with Such Sales to be Free and Clear of All Liens, Claims, and Encumbrances; (ii) Authorizing the Assumption of the Disposition Agreement; and (iii) Granting Related Relief (the Store Closing Motion ), each concurrently filed herewith. I have reviewed and am familiar with the DIP Financing Motion and the Store Closing Motion and the relief sought therein. 3. In forming the views set forth herein, I have relied upon and/or considered, among other things, the following: (i) my experiences in chapter 11 cases, including with debtorin-possession ( DIP ) financing facilities and plan sponsorships; (ii) the DIP Financing Motion and the Store Closing Motion; (iii) the Declaration of Mark T. Walsh in Support of First Day Motions filed concurrently herewith (the First Day Declaration ); (iv) certain of the Debtors financial statements and reports; (v) documents related to the proposed DIP financing; (vi) FTI s analyses regarding the proposed DIP financing and DIP financings in other chapter 11 cases; (vii) discussions with the Debtors management concerning the Debtors business and finances; (viii) discussions with, and proposals by, prospective sources of DIP financing, including with 2

3 Case Doc 16 Filed 04/18/16 Page 3 of 10 regard to the proposed DIP financing; and (ix) discussions with certain other professionals at FTI and other advisors to the Debtors. Professional Background and Qualifications 4. FTI is a global business advisory firm that provides multidisciplinary solutions to complex challenges and opportunities. The restructuring and turnaround experts at FTI help management stabilize finances and operations to reassure all parties-in-interest that proactive steps are being taken to enhance value. FTI s professionals have a deep expertise across many industries, allowing them to quickly ascertain key issues and react immediately on behalf of their clients. For clients in crisis, FTI professionals develop liquidity forecasts, improve cash flow management, obtain additional financing, negotiate loan covenant waivers, and guide complex debt restructuring, among other services. 5. I have over 30 years of experience, including more than 26 years serving as an advisor to private equity firms, corporations, lenders, and boards of directors of underperforming businesses and companies in transition. I previously served as the national leader for FTI s Retail and Consumer Products practice. I have served clients in interim management roles including as chief restructuring officer and chief operating officer. I have substantial experience in a number of industries as a result of leading successful engagements both in the United States and throughout the world. In such roles, I have led project teams on more than 100 engagements to help my clients revitalize operations, implement operational improvements, and reposition businesses for future growth. The assignments I have led have included both public and private companies ranging in size from $50 million to more than $12 billion in annual revenue. 6. Some of my retail engagements over recent years include Sports Authority, PacSun, Radio Shack, Circuit City, Ritz Camera, Fortunoff, Bob s Stores, Goody s Family 3

4 Case Doc 16 Filed 04/18/16 Page 4 of 10 Clothing, and Mervyn s. I have also advised on numerous private company matters involving middle market and large companies. I joined FTI in connection with its acquisition of PricewaterhouseCoopers Business Recovery Services group. During my 14 years at that firm, I held key roles in the turnaround and/or restructuring of companies in many different industries around the globe. In 2010, I was inducted as a fellow into the American College of Bankruptcy. I hold an MBA in finance, management policy, and marketing from the J.L. Kellogg Graduate School of Management at Northwestern University and a B.S. in finances from Boston College. Retention of FTI and the Debtors Cases 7. In March 2016, the Debtors engaged FTI to provide general financial advisory services in connection with assessing the Debtors financial situation, analyzing the Debtors business segment and store portfolio, providing liquidity management services, and assisting with contingency planning, including a possible chapter 11 filing and/or plan of reorganization. I lead the FTI team in connection with its representation of the Debtors. 8. In addition, as of March 26, 2016, I have served as CRO for each of the Debtors and remained in such capacity until the Petition Date; as of the Petition Date, I serve as co-cro for each of the Debtors, together with my colleague Mark Weinsten. In my position as CRO of the Debtors, Mr. Weinsten and I are vested with power and authority to (i) negotiate the terms of DIP financing for the Debtors and related adequate protection arrangements in respect of the Debtors credit facilities, (ii) negotiate the terms of any plan or pre- or post-petition asset purchase agreement to which any affiliate of Versa Capital Management, LLC is proposed to act as sponsor or party thereto, and to enter into binding and definitive agreement(s) on behalf of the Debtors with respect to the foregoing, and (iii) supervise the structuring and conduct a sale or plan process for the Debtors, including negotiating the terms of any competing bids. Mr. 4

5 Case Doc 16 Filed 04/18/16 Page 5 of 10 Weinsten and I are also authorized to enter into binding agreements on behalf of the Debtors with respect to the matters listed in the preceding sentence. 9. As described in more detail in the First Day Declaration, when the Debtors retained FTI, they were facing serious liquidity issues. Faced with these issues and in consultation with FTI and Lincoln Partners Advisors LLC ( Lincoln ), the Debtors proposed investment banker, the Debtors determined that it would not be possible to restructure the Debtors out of court. The Debtors concluded that the commencement of chapter 11 cases offered the best path for the Debtors to restructure their balance sheets and position themselves for future success of their core brands, as well as to maximize the value of their businesses and assets for their estates and creditors. As a result, the Debtors determined to focus their efforts on negotiating a chapter 11 transaction and obtaining DIP financing. The Store Closing Sales 10. As part of their chapter 11 preparation process, the Debtors, with assistance from FTI and Lincoln, conducted an analysis of the performance, sales, and profitability of all of the retail stores across the Bob s Stores, Eastern Mountain Sports ( EMS ), and Sport Chalet brands. Ultimately, the Debtors determined that commencing going out of business sales (the Store Closing Sales ) of the Sport Chalet stores (along with a limited number of EMS stores and one Bob s Stores location) (together, the Closing Stores ) offers the best way under the circumstances to maximize the value of the Debtors businesses and assets for their estates and creditors. 11. Accordingly, in early April 2016, I and my team, working closely with the Debtors management and other advisors, contacted certain nationally recognized potential liquidators to solicit interest in bidding on the right to conduct the Store Closing Sales. We 5

6 Case Doc 16 Filed 04/18/16 Page 6 of 10 asked the liquidators to submit bids for one or more of the following: (i) liquidations of only the EMS and Bob s Closing Stores; (ii) liquidations of only the Sport Chalet Closing Stores; and/or (iii) liquidations of all of the Closing Stores. Ultimately, we received two individual bid packages: (i) a package consisting of separate bids for all Closing Stores and for just the Sport Chalet Closing Stores; and (ii) a package consisting of a bid for all Closing Stores. 12. After an expedited but active negotiation process with the bidding liquidators, the Debtors, with assistance from FTI and Debtors counsel, and input from the Debtors prepetition first- and second-lien lenders and their respective counsel, selected Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC (together, the Agent ) to conduct the Store Closing Sales, in accordance with the terms of that certain Letter Agreement Governing Inventory Disposition, dated as of April 15, 2016 (the Store Closing Agreement ), by and between the Agent, on the one hand, and EMS Operating Company, LLC, Bob s Stores, LLC, Sport Chalet, LLC, and Sport Chalet Team Sales, LLC, on the other hand. I personally participated in the Debtors negotiations with the Agent and believe that the terms of the Store Closing Agreement were negotiated in good faith and at arm s length between the Debtors and the Agent. I believe that the Store Closing Agreement s terms are fair, reasonable, and appropriate under the circumstances. 13. I understand that the Agent, comprised of two nationally recognized liquidation firms, has extensive experience in conducting liquidation sales and can oversee and assist in the management and implementation of the Store Closing Sales in an efficient and cost-effective manner. 14. As is customary, the Store Closing Agreement requires that the Debtor-parties assume that agreement. If the Store Closing Agreement is not assumed, I believe there will be 6

7 Case Doc 16 Filed 04/18/16 Page 7 of 10 significant harm to all stakeholders. The Debtors estates would lose the benefit of the Agent s experience with the Debtors and their momentum with, preparation for, and commencement of the Store Closing Sales. The Debtors would need to suspend the Store Closing Sales, conduct a process to find a new liquidation agent or agents, and then recommence the Store Closing Sales. I believe that the resulting disruption and delay would lead to a material loss of value and increased administrative expense. Consequently, in my view, approving the assumption of the Store Closing Agreement is in the best interests of the Debtors estates and creditors. Proposed DIP Financing and Projections 15. In consultation with their advisors, the Debtors negotiated with certain of their existing lenders regarding potential DIP financing to support the Debtors efforts in these Cases. Ultimately, Wells Fargo Capital Finance, LLC (the DIP Agent ), the agent under the Debtors first-lien Pre-Petition Loan Agreement (as defined in the DIP Financing Motion), agreed to provide DIP financing to the Debtors in the form of senior secured debtor in possession revolving credit facility (the DIP Facility ). 16. With the assistance of counsel, I have personally participated in the Debtors negotiations with the DIP Agent and believe that the terms of the DIP Facility and the agreements related thereto were negotiated in good faith and at arm s length between the Debtors and the DIP Agent, resulting in agreements designed to permit the Debtors to maximize the value of their assets. Hard bargaining occurred on both sides. I believe that the proposed terms are fair, reasonable, and appropriate under the circumstances. 17. In connection with entry into the DIP Facility, the Debtors, with input and assistance from FTI, prepared the cash flow and operating projections (the Projections ) set forth as Exhibit D to the DIP Financing Motion. The Projections represent the Debtors estimate 7

8 Case Doc 16 Filed 04/18/16 Page 8 of 10 of their near term financial performance, recognizing that any financial projection is just an estimate of future performance, and actual performance may differ. The Projections are expressly premised on approval of the DIP Facility on an interim and final basis. The Projections assume no new debt incurrence (other than the incurrence of trade debt in the ordinary course) or equity financing, capital, or other liquidity infusion (other than collection of accounts in the ordinary course), and further assume that the Debtors have access to their existing cash and future cash collections during the period covered by the Projections, subject to the terms of the DIP Facility. It should be noted that the DIP Facility provides for what is commonly referred to as a creeping roll, under which post-petition collections are applied to the first lien pre-petition indebtedness, subject to the reservation of rights as to challenges set forth in the proposed financing order. The effect of these repayments are set forth in the Projections. In my experience, arrangements such as this are common in circumstances where the first lien lender is providing debtor in possession financing, the financing is in the form of a revolver facility (secured by substantially the same collateral as the prepetition facility) and collateral valuation indicates that the first lien lender is highly likely to be over-secured. All of these factors are present here and, in my judgment, warrant approval of this arrangement. 18. As reflected in the Projections, the Debtors have an immediate need to access the DIP Facility during the first thirty days of the Cases. In the first four weeks of the Cases alone, the Debtors project that they will need to borrow approximately $39 million and may need up to $12 million in letters of credit. The Projections demonstrate that without access to liquidity, the Debtors would have insufficient cash and cash collections beyond the first week of the Cases and, therefore, insufficient cash collateral (assuming all cash and cash collections constitute cash collateral) to operate their businesses beyond this week, resulting in immediate and irreparable 8

9 Case Doc 16 Filed 04/18/16 Page 9 of 10 harm to the estates, creditors and stakeholders. The DIP Facility will enable the Debtors to continue to access cash necessary both to operate their business and conduct the Store Closing Sales. In my view and I cannot overemphasize how important this is the DIP Facility will send a positive signal to the Debtors vendors, employees, and other parties critical to maintaining the Bob s Stores and EMS businesses as going concerns. Having the support of a DIP lender is critically important to a chapter 11 retailer, particularly where, as here, the Debtors are simultaneously preserving a portion of their businesses as a going concerns and liquidating a legacy business. 19. In my view, the DIP financing is a vital component in preserving the value of the Debtors business and, as such, is in the best interests of the Debtors estates and creditors. 9

10 Case Doc 16 Filed 04/18/16 Page 10 of 10 Pursuant to 28 U.S.C. 1746, I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge and belief. Executed this 18th day of April, 2016 at Boston, Massachusetts. Vestis Retail Group, LLC, et al., Debtors and Debtors in Possession By:/s/ Robert J. Duffy Name: Robert J. Duffy Title: Chief Restructuring Officer 10