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No ‘White Knight’ for Bankrupt Barneys but $218 Million DIP Financing Rolls In

Barneys New York has garnered better financing terms for its debtor-in-possession facility to operate while in bankruptcy proceedings, and interim approval paves the way to fund payroll and get new inventory to its stores.

Joshua Sussberg, the retailer’s bankruptcy counsel at Kirkland and Ellis, said at a court hearing on Tuesday for First Day Orders, “We do not have a white knight as we stand here today. We have parties competing for financing.”

That at least was a small bit of good news for the bankrupt retailer. The company filed its voluntary Chapter 11 petition in the wee hours of Tuesday morning in a bankruptcy court in Poughkeepsie, N.Y. The retailer also said it secured a $75 million commitment for debtor-in-possession financing from Hilco Global and Gordon Brothers Group.

Word first surfaced that a bankruptcy filing was a possibility in mid-July, although Sussberg said he got a call from Barneys’ chief executive officer Daniella Vitale on June 22 regarding distress at the specialty retailer.

Sussberg told the court that just 30 minutes before the afternoon hearing began, the retailer received a DIP financing facility from Brigade Capital Management and B. Riley Partners that gives Barneys more flexibility to operate while it tries to find a buyer. The new financing totals $218 million, and the additional funding allows Barneys to “takeout” the existing secured lenders, an asset-based loan of $141 million from Wells Fargo and a smaller term loan of $48.8 million from TSSG, an affiliate of private equity firm TPG.

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The court hearing revealed that the new financing from Brigade and B. Riley would also give vendors the option of participating in a consignment program for goods flowing to the stores that Barneys plans to keep open. While Hilco and Gordon Brothers countered with a new proposal during the hearing, Barneys elected to go ahead with the financing from Brigade and B. Riley.

Barneys was turned down by Wells Fargo for DIP financing before its Chapter 11 filing, and court testimony indicated that TSSG was willing to loan Barneys another $10 million, but had certain requirements, such as stipulating that almost all stores must be shuttered, with the exception of two locations.

The court allowed for interim financing of $75 million, which would allow Barneys to make payroll, pay some service providers and get new inventory into its stores. Interest on the $75 million is Libor, plus 12 percent. The parties will be back in court next week for another hearing on financing to repay its existing secured lenders.

Barneys bankruptcy counsel also emphasized to the court that the plan is to find a buyer and keep the retailer in operation.

Sarah Foss, analyst at Debtwire, believes that Barneys has a “real possibility of reorganizing around a smaller footprint of stores.” She also noted that the Barneys name still has value and expects potential buyers to be forthcoming.

Sussberg during the court hearing noted that while there has been an industry-wide decline in brick-and-mortar sales, with a massive shift to the online channels, “60 percent of Barneys’ customers” are millennials who actually do shop in the stores. He also noted that Barneys has plans to open new stores in Miami-area Bal Harbour, the American Dream Mall in New Jersey and in Las Vegas.

As for where Barneys stands size-wise relative to luxury competitors, David Silverman, senior director at credit ratings firm Fitch Ratings, said, “Within luxury retail, Barneys’ revenue base of $800 million is well below that of Neiman Marcus, while Saks [Fifth Avenue] is part of Hudson’s Bay, which generated around $7 billion in revenue.”

Barneys’ chief restructuring officer, Mohsin Y. Meghji, filed a court affidavit indicating that “cash-on-delivery demands have paralyzed the inventory stream” and that the retailer has been operating without sufficient liquidity throughout the summer of 2019.

The initial expectation under the Hilco and Gordon Brothers financing was to have an approved sale of the company no later than Oct. 4, 2019. The court hearing indicated that Barneys, with the flexibility now available with new lenders on board, might have limited leeway on that timing.

Meghji also noted that Barneys employs about 2,300 employees, comprised of 2,100 full-timers and 200 part-timers. It also has 900 employees who are part of a labor union.

The retailer said that it plans to close 15 locations. According to Meghji, the stores slated for closure collectively generated $14.2 million in losses for fiscal year 2018, or “98 percent of the total losses from stores with negative contribution margin.” The chief restructuring officer also noted that Barneys experienced a “sharp increase in rent obligations and corresponding credit support obligations of approximately $12 million and $6 million, respectively,” compared to fiscal year 2018.

With vendors and factors holding back support and July historically driving low sales volume, Barneys’ credit crunch meant that committed payments of $34.5 million for rent, payroll, sales tax and purchase card expenses would leave it with minimal funds to satisfy its vendor base, Meghji said.