Fast Fashion: The Case of FullBeauty Brands
FullBeauty Brands Holdings Corporation, together with its affiliates (FullBeauty or the Company), is a direct-to-consumer retailer in the plus-size apparel market incorporated in Delaware and headquartered in New York. Prior to filing for bankruptcy protection on 3 February 2019 (the petition date), the Company experienced, among other things, a distressed retail apparel market and reduced profit margins, revenue and consumer engagement. In addition, the Company had nearly US$25 million in interest payments coming due on 31 October 2018. As a result, FullBeauty began recruiting a new executive team in 2017, and, in July 2018, engaged restructuring advisers to assist it in exploring strategic alternatives.
Months of negotiations
Following months of negotiations with holders of more than US$1 billion in debt, the company reached an agreement regarding a consensual, comprehensive restructuring with key stakeholders, which was memorialised in a restructuring support agreement on 18 December 2018 (RSA). To implement the financial restructuring contemplated by the RSA, the Company filed voluntary petitions for reorganisation pursuant to Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the Court) along with a prepackaged plan of reorganisation implementing the terms of the restructuring contemplated by the RSA (the Plan). The Plan was confirmed by the Court less than 24 hours after filing for Chapter 11 protection, setting a new record for the fastest Chapter 11 case – a record previously held by Blue Bird Body Co., a school bus manufacturer, which confirmed its plan of reorganisation in less than two days. FullBeauty emerged from bankruptcy three days after the Plan was confirmed.
Terms of the Plan
The restructuring contemplated by the Plan provided for the conversion of approximately US$782 million in first lien credit facility claims to a combination of equity, US$175 million of a new first lien facility, and up to US$35 million of a new junior loan; the conversion of approximately US$345 million of second lien debt into a combination of equity, warrants and US$15 million of a new junior loan; and a new-money capital infusion in the form of a US$30 million exit first lien facility. General unsecured creditors, including contract and lease counterparties, were not affected (i.e., were unimpaired) by the Plan.
Access to prepackaged plan option
Although prepackaged bankruptcies are not novel and there have been a growing number of quick prepackaged cases in the last few years, there are often particular case attributes that will facilitate a company’s quick sprint through Chapter 11. Absent these attributes, a successful prepackaged bankruptcy case is not guaranteed to succeed, especially not one on an expedited timeline.
FullBeauty was an early innovator in the direct-to-consumer fashion market with operations dating back to 1901, when the Company launched its first catalogue. In the mid-20th century, FullBeauty began to expand its plus-size market share and industry presence. In 2001, FullBeauty launched its first e-commerce website and in the two decades preceding the petition date the Company had ‘established itself as a leading plus-size eCommerce retailer by sales and breadth of product selection’. In 2007, the Company introduced fullbeauty.com, a website offering a selection of plus-size apparel, footwear and accessories products across its brands. The Company continues to operate its online sales operations through its online platforms as well as third-party market places.
Pre-restructuring equity ownership
In connection with its expansion, FullBeauty was the target of a series of third-party acquisitions, beginning in 1999, when FullBeauty was acquired by Kering SA and organised as Redcats USA. Following this acquisition, in the six years preceding the petition date, the Company took on more than US$1.2 billion in debt to fund additional leveraged buyouts.
First, in February 2013, private equity sponsors Charlesbank Capital Partners (Charlesbank) and Webster Capital (Webster) purchased FBB through a leveraged buyout valued at approximately US$522 million, with an implied original equity investment of around US$130 million. Charlesbank and Webster thereafter took three dividends with a total value of over US$362 million, which were largely debt-financed.
Then, in 2015, FullBeauty went through a competitive bid process in connection with a second leveraged buyout. At the conclusion of the sale process, FullBeauty announced a deal with certain funds managed by Apax Partners (Apax) valued at approximately US$1.8 billion. Apax contributed approximately US$490 million in equity. The total cash raised was approximately US$1.55 billion owing to original issue discounts (OID) on the debt raised in conjunction with the transaction (US$820 million of first-lien debt at 93 OID; US$345 million of second-lien debt at 87 OID; US$490 million equity).
Following these acquisitions, Apax and Charlesbank (the Sponsors) held approximately 74 per cent and 26 per cent, respectively, of the outstanding equity in the Company’s ultimate parent.
Pre-restructuring capital structure
The Company had a simple prepetition capital structure. As of the petition date, FullBeauty had outstanding funded debt obligations in the aggregate principal amount of approximately US$1.3 billion, including:
- an asset-based loan facility (the ABL facility) in the aggregate principal amount of US$143.9 million, which included a first-in, last-out (FILO) tranche in the amount of US$75 million;
- a first lien credit facility in the amount of US$781.6 million; and
- a second lien credit facility in the amount of US$345 million.
Reasons for restructuring
In addition to its significant debt service obligations, the Company encountered a number of hurdles in the months leading up to its Chapter 11 cases. In particular, FullBeauty faced a number of operational and financial difficulties on account of, among other things, merchandising and pricing issues, which difficulties contributed to a decline in EBITDA. These circumstances, compounded with a generally depressed retail apparel market at a time when FullBeauty also faced competition from new entrants as well as competition from Amazon, Inc and department stores such as Kohl’s, Walmart and JC Penny, began to overwhelm the Company’s operations and resulted in tightening liquidity beginning in 2017.
In response to the above circumstances, the Company recruited a new executive team, beginning with a new chief executive officer in November 2017. Nonetheless, in the first quarter ending 31 March 2018, the Company posted a 32 per cent decline in EBITDA and a 3.5 per cent decline in revenue. Predictably, by summer 2018, there were reports of lender groups forming and demanding additional information from the Company, including, among other things, a collateral review and a perfection analysis.
The Company ultimately determined that FullBeauty needed to explore strategic alternatives to deleverage its balance sheet and achieve a more sustainable capital structure.
Overview of restructuring process
To assist with a potential restructuring, in July and August 2018, the Company retained restructuring advisers who assisted the Company’s management in assessing strategic alternatives.
After it retained restructuring advisers, the Company needed to make a series of key decisions in autumn 2018, which ultimately shaped its restructuring path.
To start, the Company had to decide whether it was going to pursue a short-term solution that would leave its first lien debt in place, over a more comprehensive restructuring. The Company determined that its priorities would be to increase liquidity and deleverage its balance sheet. To achieve these goals, the Company required a comprehensive restructuring of its funded debt obligations. Following the decision to pursue a comprehensive solution, the Company proceeded to negotiate forbearance agreements with respect to the ABL facility and the first lien credit facility, pursuant to which the applicable lenders agreed to forbear from enforcing remedies in connection with certain specified defaults.
The Company then had to decide whether to make the interest payments on account of the first and second lien facilities due on 31 October 2018. In connection with this decision, the Company elected to draw down US$24.5 million under its ABL facility on 30 October 2018. The funds provided FullBeauty with sufficient liquidity to make the interest payments if it elected to do so; however, satisfying the interest payments in full would have reduced the Company’s liquidity from approximately US$52.5 million as of 30 October 2018, to approximately US$26.3 million. Accordingly, the Company had a critical choice to make: (1) make the 31 October interest payments to avoid defaulting under its loans, which would mean sacrificing 100 per cent of the proceeds of the ABL facility draw – liquidity that was needed to maintain operations, implement its new business plan and preserve optionality in furtherance of ongoing discussions with lenders; or (2) elect not to make the interest payment, which would trigger a default under its loans at a time when the Company was already experiencing financial difficulty and tightening trade terms. Following discussions with its advisers, the Company chose to make the US$14.6 million FILO and first lien facility interest payments and took advantage of a 150-day standstill provision with respect to the US$10 million interest payment due under the second lien facility.
The Company’s elections paved the way for continued negotiations with key stakeholders while providing much needed stability to the business. Importantly, the additional time provided by the forbearance agreements enabled the Company, an ad hoc group of lenders under the first lien facility (the first lien ad hoc group), an ad hoc group of lenders under the second lien facility (the second lien ad hoc group), and the Sponsors to finalise and memorialise the terms of a fully consensual prepackaged restructuring.
Restructuring support agreement
In November 2018 – concurrent with announcing entry into the forbearance agreements – the Company announced that it had reached ‘an agreement in principle with its key stakeholders on the terms of a consensual transaction that will significantly deleverage its balance sheet and contemplates payment of the Company’s trade partners in the ordinary course of business’.
The terms of the restructuring were memorialised in the RSA, dated 18 December 2018. The transactions contemplated by the RSA included a balance sheet restructuring designed to eliminate approximately US$900 million of the debtors’ funded-debt obligations and minimise the time and expense associated with the Chapter 11 cases. Furthermore, as part of the agreed terms, the Company secured a US$30 million new money credit facility to fund the reorganised the Company’s working capital and operational needs upon emergence from Chapter 11.
Pursuant to the RSA, subject to certain conditions, the Company had the option of pursuing either an out-of-court restructuring or confirmation of the prepackaged Chapter 11 plan, each reflecting the terms set forth in the RSA. This dual-track approach is not unusual; companies do not always know whether they will have sufficient support to implement a restructuring out-of-court and, in such cases, often pursue a dual-track process. One of the advantages of a dual track approach is that a restructuring can be accomplished without the need to resort to an actual bankruptcy filing, while providing the security of a contingency plan.
The Company ultimately determined to implement the proposed restructuring through the Plan, as to which the requisite votes were obtained prior to the petition date and which it sought to confirm as quickly as possible. A summary of the treatment of claims under the Plan is set forth below:
- holders of administrative claims, priority tax claims and other secured claims and priority claims remained unimpaired;
- holders of allowed claims under the ABL facility were to be paid in full;
- holders of allowed FILO claims were to receive their pro rata share of US$75 million of the new first lien term loan, plus accrued interest;
- holders of allowed claims under the first lien facility were to receive their pro rata share of the following:
- US$175 million in aggregate principal amount of the new first lien term loan; and
- 87.5 per cent of the new common stock, subject to dilution by the management incentive plan and the warrants;
- holders of allowed claims under the second lien facility, to the extent the requisite number of such holders voted in favour of the Plan in the prepetition date solicitation, were to receive the following:
- US$15 million of the new junior loan;
- 10 per cent of the new common stock, subject to dilution by the warrants and the management incentive plan; and
- warrants as further described in the Plan; and
- holders of allowed general unsecured claims (other than any held by the Sponsors) were to remain unimpaired.
The Company, first lien ad hoc group and second lien ad hoc group also understood that to ensure an expedited restructuring process, it was important to effectuate a consensual restructuring. Accordingly, the parties took a number of steps to garner the support they required:
First, to increase the level of support from lenders under the first lien facility, the RSA and Plan provided for a 1 per cent yield enhancement fee payable in cash to lenders under the first lien facility that had signed the RSA by a date certain; and the parties agreed that the lenders under the first lien facility would have the option to receive new second lien paper in lieu of new common stock – referred to as the ‘flip up’ election.
Second, to increase the level of support from lenders under the second lien facility, the Plan included a death trap. That is, if Class 6 (holders of claims on account of the second lien facility) voted to reject the Plan, no holder of an ‘allowed second lien claim’ would receive a distribution under the Plan and the 10 per cent of the new common stock that would otherwise go to those holders would be reallocated to the holders of ‘allowed first lien claims’.
Third, the parties chose to leave all general unsecured claims unimpaired, even though such claims were clearly out-of-the-money. This not only conserved the debtors’ resources by allowing for a prepackaged restructuring, but minimised disruptions to the business, provided certainty to the Company’s customers and suppliers, and preserved the debtors’ key relationships.
Finally, the Company followed a fair and transparent process with respect to notice and solicitation in accordance with the Bankruptcy Code and the applicable rules.
As a result of these efforts, the restructuring contemplated by the RSA was supported by nearly all of the Company’s stakeholders, even prior to officially commencing the solicitation process.
On 3 January 2019, the Company announced that it had entered into the RSA and that the ‘restructuring transaction contemplated by the RSA [would] reduce [the Company’s] outstanding indebtedness by approximately US$900 million, significantly strengthening the Company’s balance sheet and enhancing financial flexibility going forward’. The Company also noted that, to implement the terms of the restructuring, it expected to file voluntary petitions for reorganisation following the expiration of a prepetition solicitation period.
On 4 January 2019, the Company published the Plan and accompanying Disclosure Statement on the website of PrimeClerk, its solicitation and claims agent. On 6 January 2019, the Company formally commenced its solicitation of the Plan and disclosure statement with ballots distributed to all three voting classes of claims. The three voting classes consisted of the lenders under the FILO, first lien facility and second lien facility. The Company also published notice of a combined hearing on approval of the Disclosure Statement and confirmation of the Plan in The Wall Street Journal and Financial Times. This notice and solicitation process commenced, as permitted by Section 1125(g) of the Bankruptcy Code.
The Company received unanimous support for the Plan – every single creditor entitled to vote actually voted in favour of the Plan. With such unanimous support, the Company filed for Chapter 11 protection and the cases were assigned to Judge Robert Drain, who sits in White Plains, New York. The first day hearing commenced on 4 February 2019 at 2 p.m. ET, and the Plan was confirmed that afternoon.
Notwithstanding unanimous creditor support, the US trustee objected to the Company’s request for plan confirmation approval on the first day of the cases, arguing, among other things, that the proposed timeline would enable the Company to ‘race through the Chapter 11 too quickly and [not] provide any time for parties-in-interest, governmental agencies, and the Court’ to evaluate, respond or object to the plan. While acknowledging that the Bankruptcy Code authorises prepackaged bankruptcy plans where most of the activity takes place before a case is filed, the United States trustee argued that ‘it does not authorise debtors to short-circuit the bankruptcy process so as to avoid post-petition scrutiny or to violate basic principles of due process’. At the hearing, the representative for the office of the United States trustee argued that the case was as close as you can get to a ‘secret bankruptcy case that essentially takes place outside of the jurisdiction of the Court’.
In response to the objections made by the United States trustee, the Court emphasised, first, that the Bankruptcy Code allows debtors to commence solicitation of a plan before the filing of a Chapter 11 petition, ‘notwithstanding that the Court had not at that point approved the disclosure statements, so long as the disclosure statement is subsequently approved’. Further, ‘[i]n keeping with those directions from Congress, the Board of Judges of the Bankruptcy Court for the Southern District of New York has long had in effect guidelines through general orders for prepackaged Chapter 11 plans.’ The Court ultimately found that the debtors complied with the applicable guidelines, including providing more than 15 days contemplated for voting by a non-public debt-holder – the Company had provided 19 days and over 28 days to object to confirmation of the Plan and approval of the Disclosure Statement. The Court also noted that the debtors engaged with the office of the United States trustee prior to filing for bankruptcy protection and even incorporated certain changes into the Plan in connection with those discussions. The Court explained that ‘Congress clearly had in mind the prospect of confirming plans’ at the ‘very initial stages’ of a Chapter 11 case if a company is able to meet all of the confirmation requirements.
The Court ultimately confirmed the Plan, explaining that the ‘nature of [the Plan] is really tailor-made for such a process in that it leaves unimpaired all creditors, except the three that were very much involved in the plan formulation process and that have unanimously accepted the plan’. Indeed, the Court explained that ‘there are good reasons to have a plan confirmed very promptly that might not rise to the level of being a compelling reason, as long as, again, the notice and confirmation requirements are satisfied.’ In the case of FullBeauty the ‘good reasons’ highlighted by the Court and the debtors included that the debtors’ supply chain was largely made up of foreign suppliers and the debtors were clearly committed to a tight management of their cash.
Final post-restructuring structure
Following confirmation, the debtors implemented the terms of the Plan, resulting in a significant deleveraging of their capital structure as reflected in the below chart:
|Capital structure as of 1 January 2019||Post-emergence capital structure|
|Principal outstanding||Principal outstanding|
|ABL loans (including letters of credit obligations)||US$69 million||Exit ABL facility (including letters of credit obligations)||US$71 million|
|FILO facility||US$75 million||Exit new money facility||US$30 million|
|First lien credit facility||US$782 million||New first lien term loan||US$252 million|
|Second lien credit facility||US$345 million||New junior loan||US$15 million to US$50 million|
|Total funded debt||US$1.271 billion||Total funded debt||US$368 million to US$403 million|
In addition, all general unsecured claims were paid in full or reinstated, as if the bankruptcy had never occurred – a fundamental component of the restructuring.
Once it became clear that a comprehensive solution was the best option, the Company worked with the ad hoc groups to achieve a fully consensual deal as quickly as possible. The ability to effectuate a prepackaged bankruptcy enabled the Company to report to its creditors that the ultimate outcome – a quick restructuring process approved by the bankruptcy court – was more or less assured, thereby minimising any disruption to the business.
As the FullBeauty case study shows, however, the use of a prepackaged bankruptcy – even a one-day bankruptcy – does not equate to a restructuring period that is any shorter than what may occur in a traditional Chapter 11 case. Negotiations leading up to a prepackaged filing can take, as they did in FullBeauty, many months. Moreover, a prepackaged bankruptcy is not necessarily the best option for every company, if it is even an option at all. Whether a prepackaged bankruptcy is an option will depend entirely on the facts and circumstances of a particular case. Successful prepackaged bankruptcies only make sense in cases where there are relatively simple capital structures, with few creditor classes and an indisputable fulcrum security.
Moreover, even if a prepackaged bankruptcy case makes sense in a particular situation, the expedited relief granted to FullBeauty is not guaranteed. As the US trustee noted in FullBeauty, ‘approval of confirmation FullBeauty in less than twenty-four hours after the filing of the petition . . . [is] a . . . departure from the normal practice’. There were unique facts and circumstances that merited a quick restructuring: the Company was only seeking a financial restructuring, there was an undisputable fulcrum security, the entire capital structure was on board with the proposed restructuring, trade was set to ride through unimpaired, all contracts were being assumed and, importantly, there were no brick-and-mortar store locations.
That is not to say that we will not see quick restructurings in the future. Indeed, FullBeauty did not hold its record very long. Approximately three months following the Company’s emergence from Chapter 11, Sungard Availability Services filed a prepackaged case and confirmed its plan of reorganisation within 19 hours of filing – one hour faster than FullBeauty – and emerged from bankruptcy in less than two days.
1 Dennis F Dunne is a partner, Dennis C O’Donnell is of counsel and Nelly Almeida is a partner at Milbank LLP.
2 In describing events after the petition date, FullBeauty Brands Holdings Corporation and its affiliates that filed for Chapter 11 protection will be referred to as the debtors and, each entity, a debtor.
3 In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 2019), Disclosure Statement [Docket No. 14] (the Disclosure Statement), at 42–43.
4 id. at 43.
5 id. at 13.
6 Disclosure Statement, at 33–4.
7 id. at 34.
9 id. at 34.
11 ‘FULLBEAUTY auction enters home stretch; banks line up with 6.75x leverage’, Debtwire (31 July 2015).
13 Sources estimated that the sale price would be around 10x EBITDA totalling at least US$1.75 billion. At 10x EBITDA, Webster and Charlesbank were estimated to receive approximately US$965 million in the transaction, which would have resulted in a 920 per cent total return on their initial equity investment. At close, it was estimated that FullBeauty would have US$105 million in liquidity.
14 On 31 October 2018, the Company was scheduled to pay approximately US$26.2 million in interest payments, consisting of: an approximately US$2 million interest payment under the FILO; an approximately US$14.2 million interest payment under the first lien facility; and an approximately US$10 million interest payment under the second lien facility.
15 Earnings before interest, tax, depreciation and amortisation.
16 Disclosure Statement, at 42–3.
17 Reorg Research, ‘FullBeauty Sponsor Apax Partners Working with PJT Partners to Explore Discounted Buybacks’, 14 August 2018.
18 Reorg Research, ‘Lender Group Holding 50% of FullBeauty’s TLB Seeks Added Disclosure from Management as Earnings Decline’, 15 June 2018; id.
19 id. at 13.
20 Disclosure Statement, at 43.
23 ‘FullBeauty Brands Enters Into Forbearance Agreements With Lenders’, 9 November 2018, http://www.prnewswire.com/news-releases/fullbeauty-brands-enters-into-forbearance-agreements-with-lenders-300747480.html.
24 Each description of the RSA, the Plan or the Disclosure Statement herein is qualified in its entirety by the terms of the RSA, the Plan or the Disclosure Statement, as applicable.
25 Lenders under the first lien facility elected to ‘flip up’ and receive approximately US$12 million in aggregate principal amount of the new junior loan. See ‘Debtors’ Memorandum of Law in Support of an Order Approving the Debtors’ Disclosure Statement for, and confirming, the Debtors’ First Amended Joint Prepackaged Chapter 11 Plan of Reorganization’, at 18 [Docket No 19].
26 ‘FullBeauty Brands Enters Into Comprehensive Restructuring Support Agreement with Debt and Equity Holders’, 3 January 2019 http://www.prnewswire.com/news-releases/fullbeauty-brands-enters-into-comprehensive-restructuring-support-agreement-with-debt-and-equity-holders-300772300.html.
28 In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 3 February 2019), Declaration of Craig E Johnson of Prime Clerk LLC Regarding the Solicitation of Votes and Tabulation of Ballots Cast on the Joint Prepackaged Chapter 11 Plan of Reorganization of FullBeauty Brands Holdings Corp. and its Debtor Affiliates Pursuant to Chapter 11 of the Bankruptcy Code [Docket No. 18].
29 In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 3 February 2019), Objection of the United States Trustee to Confirmation of the Plan and Related Relief, Pg. 1–2 [Docket No. 34].
31 In re FullBeauty Brands Holdings Corp., Case No. 19-22185 (RDD) (Bankr. S.D.N.Y. 2019), Confirmation Hearing TrPg. at 22: 15–19. (4 February 2019 (the Confirmation Hearing Tr).
32 Confirmation Hearing Tr at 55: 1–6.
33 Confirmation Hearing Tr at Pg. 55: 9–12.
34 Confirmation Hearing Tr at 56: 4-7.
35 Confirmation Hearing Tr at 56: 8–10.
36 Confirmation Hearing Tr at 56: 14–18.
37 Confirmation Hearing Tr at 56: 19–25.
38 The below chart is from the Disclosure Statement. Disclosure Statement, at 10.
39 Objection of the United States Trustee to Confirmation of the Plan and Related Relief, Pg. 12 [Docket No. 34].