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Forever 21 Bankruptcy Unmasks Major Debt Load, Positions Suppliers for ‘Instability’

Forever 21 Inc. filed a much expected petition for Chapter 11 bankruptcy court protection on Sunday, and the filing finally pulls back the curtain on the retailer’s financial structure.

Among its many errs—largely driven by its lack of adapting to the new demands of today’s fashion consumer—the teen fast fashion chain was carrying a sizable debt load.

According to the bankruptcy filing, Forever 21 owed lenders $227.7 million and vendors more than $350 million before Sunday’s filing. As of Sunday’s petition, the company also owes its top landlords a total of $20.9 million. Among the top three are Simon Property Group at $8.1 million, Brookfield Properties at $5.3 million and Macerich at $2.7 million. And all of that debt fails to consider the $40 million that will come due to landlords on Oct. 1 as part of its monthly rental obligations.

Forever 21 has more than 100,000 creditors, and lists both estimated total assets and estimated total liabilities at between $1 billion to $10 billion.

As a privately held firm, the retailer wasn’t obligated to publicly file financial statements on a regular basis. Commercial lenders over the years, including factors, had complained about the paucity of financial statements, which made it hard for them to make credit checks in order to grant approval to vendors seeking to sell goods to the teen fast-fashion chain. Many factors stopped checking the company about two years ago, leaving vendors electing to ship goods taking on the risk of nonpayment.

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Debt load

According to court documents filed by Forever 21’s bankruptcy counsel, its pre-petition debt consisted of $194.5 million owed under an asset-based lending facility due March 2022, $20 million in term loan agreements due December 2019, and $13.2 million owed to Praxton Commercial Corp. due October 2020.

Praxton, based in The Philippines, is listed as No. 2 on the top 50 list of holders of unsecured debt. The term loan agreements are also unsecured. There’s a $10 million loan from CEO Do Won Chang, who co-founded the company with his wife, Jin Sook. Their two daughters, Linda and Esther—who co-founded beauty brand Riley Rose, an affiliated firm that also filed a Chapter 11 petition—each loaned Forever 21 $5 million through trust agreements.

In addition to Forever 21 and Riley Rose, there are six other affiliated debtors who all filed bankruptcy petitions in Delaware. Included among the filers is a Canadian subsidiary, which plans to shutter all 44 stores across Canada as it winds down the business. The 15 Riley Rose stores in operation are also expected to close. Forever 21 operates a total of 815 doors globally, under the names Forever 21, its deep value concept F21 Red and Riley Rose. While the U.S. stores on the chopping block total 178 doors, stores in Asia and Europe will also shutter, bringing the total number of stores slated to go dark closer to 350.

Supply chain concerns

With 1,300 vendors and suppliers, challenges lie ahead for many that rely on Forever 21 to keep their business afloat.

“The debtors make up a substantial portion of these vendors’ businesses. Such vendors would likely face their own liquidity issues without a continuing, stable payment plan, and the consequences of their instability would ultimately be borne by the debtors,” Jonathan Goulding, a principal at Alvarez & Marsal North America hired as chief restructuring officer, said in a court declaration. “With less than sixty days until the start of the winter holiday season (beginning with Black Friday and continuing into the December holidays), even a minor disruption would put the debtors’ entire supply chain at risk during a crucial period for the debtors’ overall sustainability.”

To ensure continuity of its supply chain, Goulding said Forever 21 entered into pre-petition vendor agreements with more than 130 of its most critical vendors–representing over $240 million of their current accounts payable–both to ensure supply chain stability leading up to the filing and to protect it going forward. The agreement provides for six weekly payments starting the week of Sept. 23 and into the post-petition period. Vendors agreed to continue to supply merchandise for six months, and receive payment on 45-day terms for all shipments after Sept. 23.

Goulding filed the document in support of the bankruptcy court’s approval of its debtor-in-possession financing facility. The $350 million secured DIP facility is comprised of $275 million in financing from existing lender JPMorgan Chase and $75 million in junior financing from TPG Sixth Street Partners.

According to Goulding, the retailer has a cash management system that includes intercompany receivables and payables where cash, after rent and operating expenses, at the end of the month are swept back to Forever 21. This system is expected to be less complex as the company exits from underperforming international operations. Forever 21 said it plans to keep its operations in The Philippines, Mexico and Latin America, while exiting overseas operations in Asia and Europe. Goulding said the Latin American business is one of Forever 21’s most profitable operations, with about “96 percent of the stores generating positive cash contributions.”

Forever 21 will also keep its trading company in Shanghai in operation, which provides warehousing and logistical services. “Given that a majority of the debtors’ vendors are located in Asia, and Asian warehouse and logistical presence is vital to the continued maintenance of an orderly supply chain,” Goulding said.

Most of Forever 21’s vendors are located either in South Korea or China, including Hong Kong. The top unsecured creditor is KNF International Co. Ltd., Seoul, South Korea, which is owed $13.4 million. Rounding out the top five unsecured holders of trade claims are C&C Nantong Cathay Clothing Co. Ltd., Nantong, China, $12.9 million; Intec Ltd., Seocho-GU, South Korea, $10.4 million; CRS Denim Garments Egypt S.A.E., Port Said, Egypt, $9.8 million, and Suzhou TJ/Novae Int’l, Suzhou, China, $8.7 million.

Uncertainty ahead

Now that Forever 21 has filed for bankruptcy, it remains unclear as to what role, if any, Do Won Chang might have at the company, presuming it can successfully pull together an approved plan of reorganization. As the retailer was trying to strike an investment deal with top landlords Simon Property and Brookfield, sources said Chang was a key stumbling block as he wanted to retain control of the company he cofounded.

Linda Chang said Sunday that the filing was a necessary step to “secure the future of our company, which will enable us to reorganize our business and reposition Forever 21.”

Even if Forever 21 emerges from bankruptcy proceedings, Goulding said its ability to continue as a going concern is not guaranteed given its ongoing challenges on the consumer and retail front.

“Forever 21 appears to be a victim of its own rapid expansion and changing tastes in fashion and consumer spending, which have pressured top-line results,” David Silverman, senior director at credit ratings firm Fitch Ratings, said. “Like many other mall-based apparel retailers, Forever 21 expects to re-emerge as a smaller, more focused chain. However, apparel brands in decline face significant headwinds in returning to customer popularity and ongoing profitability. This can be seen in recent unsuccessful re-emergence efforts by Gymboree, Payless [ShoeSource] and Charming Charlie.”