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Global Brands Group USA Bankruptcy: Kenneth Cole, ABG and JLo Holding the Bag

The North American arm of apparel manufacturing powerhouse Global Brands Group Holding Ltd (GBG) is now under bankruptcy court protection.

Court papers estimate $150 million in unpaid trade and ordinary course obligations. Top unsecured trade creditors who are owed royalties include Kenneth Cole Productions Inc. at $6 million and Authentic Brands Group at nearly $3.6 million in royalties. Other firms holding royalty claims include Brand Matter at nearly $2 million in royalties, JLo Holding Co. LLC at $359,899 and All Saints Retail Ltd. at $244,783. Most of the other top unsecured trade creditors were landlords who are owed rent.

GBG USA filed its Chapter 11 petition in a Manhattan bankruptcy court on Thursday, along with 10 related companies, including footwear company Jimlar Corp. Only the American operation is under bankruptcy court protection. GBG’s brand management and European wholesale businesses are separate entities and are not part of the bankruptcy filing. One of GBG’s biggest assets is its joint venture with Creative Artists Agency, which operates under the name CAA-GBG. The joint venture is operated separately and also is not a party to the bankruptcy case.

“Over the past eighteen months the retail landscape has been greatly impacted by Covid-19, creating hardships for us and many others across our industry. Our business has also been impacted by ongoing structural shifts in the retail industry, as well as persistent geopolitical tensions that have disrupted supply chains,” GBG CEO Rick Darling said Thursday. “We have taken significant steps over the last year to strengthen GBG USA’s financial position while also conducting a thorough review of all strategic options for GBG USA and its brands.”

Those options have included the recent sale of GBG USA’s South Korean Spyder business to Alpha Vista Investment Co. Ltd., its Spyder USA inventory and related assets to Liberated-Spyder LLC and its Frye inventory and related assets to brand management firm Authentic Brands Group via ABG Frye LLC.

It was, in part, ABG’s taking back of its licenses for Spyder and Frye that had some market insiders at the start of the summer wondering about the future of GBG USA. But negative publicity in general was already raised earlier in the year when, in February, rapper and entrepreneur Sean “Diddy” Combs filed two lawsuits against GBG subsidiary GBG Sean John USA. One concerns publicity rights and the other was over the use of a trademarked slogan. Combs sold the majority of his streetwear label Sean John to brand management agency CAA-GBG in 2016.

It became clear in May that GBG USA “could not survive as a going concern enterprise,” chief financial officer Mark Caldwell wrote in bankruptcy court documents. Advisors began marketing its assets for sale in a prepetition bidding process in which financial advisors reached out to “45 potential buyers, entering into 30 confidentiality agreements and receiving 8 indications of interest to acquire all or certain portions of the debtors’ business.” The Spyder and Frye sales, were part of this process, Caldwell said, adding that advisors will continue shopping around the remaining salable assets.

For now, the plan is to have bankruptcy court approve bid procedures by Sept. 2, with Sept. 27 as the deadline to submit acceptable bids.

Caldwell said 85 percent of GBG USA’s revenue stems from wholesale sales across multiple distribution channels including Macy’s, Costco, TJ Maxx, Amazon.com, Burlington, Ross Stores and Zappos. The remaining revenue is generated by direct-to-consumer sales through company operated e-commerce platforms, and physical stores in New York and San Francisco.

Brands under GBG USA’s licensing umbrella include All Saints, Le Tigre, Capezio, and Saga. Company-owned brands include Aquatalia, Ely & Walker, b New York and MagnaReady. The company also partners with retailers to develop private-label brands, such as a line of footwear for Macy’s, added Mark Caldwell.

GBG USA does not do any of its own manufacturing, and instead works with a network of vendors and suppliers based overseas, according to Caldwell. Most of the network relationships are established through Millwork Pte. Ltd, a non-debtor affiliate in Singapore, which sources the manufacturing and supply of a “vast majority of the debtors’ products,” Caldwell said.

Millwork in turn is a party to a buying agency agreement with LF Centennial Pte. Ltd. The agreement includes a 5 percent fee paid by the debtors that Millwork provides to LF Centennial for its role as sourcing agent, “vetting factories and performing quality control measures for the debtors’ operations. Millwork also distributes payments by debtors for the costs of the goods to the respective manufacturers. The production process takes about six months and is “already underway for the remainder of the 2021 fiscal year,” Caldwell wrote in court documents. Completed products are shipped via ocean freighters that deliver the goods to ports in Long Beach, Calif. or Newark, N.J.

As part of the bankruptcy, GBG USA has entered into an asset purchase agreement with WH AQ Holdings LLC and Hilco Brands LLC as the stalking horse bidder for the $17.3 million purchase of Aquatalia through a court-supervised process.

GBG said the sale of Spyder and Frye provides GBG USA with cash collateral to meet immediate liquidity needs. The bankrupt firm also has received $16 million in debtor-in-possession financing from ReStore Capital LLC to finance its bankruptcy.

GBG USA’s petition lists estimated assets and liabilities each at between $1 billion to $10 billion, with the total number of creditors at between 1,000 to 5,000.

Caldwell said in court documents that the debtors have about $238.4 million in outstanding secured funded indebtedness, which includes a revolving credit facility on a first lien basis, and several other facilities on a second lien basis held by firms that include Standard Chartered, Mizuho, Citibank and HSBC. The secured debt includes an equipment leasing facility held by Banc of America and seven accounts receivable factoring agreements totaling $3.6 million in outstanding receivables with CIT Group/Commercial Services Inc.

While it blamed coronavirus for the bankruptcy, GBG and GBG USA have been struggling for some time.

The company was previously known as LF USA, a subsidiary of Hong Kong-based sourcing and supply chain giant Li & Fung Ltd. LF USA’s focus was to manage the apparel giant’s private label brands. The company steadily acquired several brands, including footwear manufacturer Jimlar in August 2010, and took the name of GBG USA when Li & Fung spun off its GBG operation in 2014. That move turned GBG into a standalone, publicly listed firm in Hong Kong with GBG USA as one of its subsidiaries.

Parent firm GBG hit some rough spots due to a challenging market environment post spinoff, and ultimately sold much of its North American licensing business to Differential Brands Group for $1.2 billion in 2018. At the time of the transaction, GBG was the licensee for a wide range of brands spanning kids’ wear, and women’s and men’s apparel and accessories. Although some of the licensed operations were sold, GBG USA did retain the licenses for Frye and Spyder, which went back under the ownership of ABG.

Following the divestiture of its North American licensing operations to Differential, Darling became GBG’s CEO after previously serving as executive director of LF Americas and president of LF USA.

In a separate change, Jason Rabin, who was GBG USA’s president, moved over to Differential and became its new CEO after it was renamed Centric Brands. During the pandemic last year, Centric filed a pre-packaged bankruptcy petition in May, and successfully restructured its balance sheet with an exit from bankruptcy proceedings in October.

However, court documents in the GBG USA bankruptcy case indicate that it was impacted by Centric’s Chapter 11 filing because of certain business arrangements related to the 2018 sale, such as transition services. Centric’s bankruptcy case had sued GBG USA for alleged claims over indemnification, misdirected cash and customs duties. GBG USA disputed the claims, but eventually settled the matter—including its own counterclaims against Centric—to avoid protracted litigation.

While parent firm GBG has continue to struggle and even posted a significant loss in fiscal year 2019, which included a loss of $250 million in operating expenses, an aggressive restructuring initiative enabled the firm to return to a profit in fiscal year 2020.

Can parent firm GBG itself avoid a bankruptcy filing? That’s still an open question. The firm’s biggest problem since the spinoff has been debt. And it was the need to reduce its debt load that preciptated the sale of a portion of its licensing business to Differential. More recently, GBG has been in talks to restructure its balance sheet, sources said.

 

 

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