Introduction
On August 16, 2019 (the “Petition Date”), Avenue Stores, LLC; Ornatus URG Holdings, LLC; Ornatus URG Real Estate, LLC; and Ornatus URG Gift Cards, LLC (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.
The Debtors are represented by Young Conaway Stargatt & Taylor, LLP. The case has been assigned to the Honorable Laurie Selber Silverstein. A hearing on the Debtors’ first day motions was held on August 20, 2019, at 10:30 a.m. (ET). A meeting to form the unsecured creditor’s committee has been scheduled for August 27, 2019, at 10:00 a.m. (ET).
Background
The Debtors are a national speciality fashion retailer of women’s plus-size apparel, intimates, footwear, and accessories. Headquartered in Rochelle Park, New Jersey, the Debtors have two primary units: the retail store business and e-commerce business. Through their retail business, the Debtors operate 225 leased stores in 35 states, which are primarily located in suburban areas and in malls or shopping centres. As of the Petition Date, the Debtors were in the process of winding down operations at thirty-two of their 225 stores and conducting clearance sales in furtherance thereof. The Debtors intend to complete store closing sales and vacate these thirty-two stores before the end of August 2019.
In addition to their retail operations, the Debtors sell and distribute merchandise through the Avenue.com and Loralett.com websites. The Debtors also have historically sold gift cards, which business has been primarily operated through Ornatus URG Gift Cards, LLC.
The Debtors have recently suffered operational losses stemming from, among other things, onerous legal obligations, underperforming retail locations, and the continued growth of online competitors and decline of in-store shoppers. Due to increased competition, the Debtors have faced significant pressure to maintain market share, which has directly and negatively affected their profitability. Although Avenue benefits from a consistent and loyal customer base, a review of historic customer data indicates that customers are shopping less frequently than they once were and sales during Avenue’s busiest periods of the year did not meet projected forecasts, leading to a reduction in liquidity. Shifts in consumer preferences in the women’s apparel retail segment, and, in the plus-size market specifically, have contributed to sales misses as well, with the Debtors ultimately placing too much emphasis on fashion basics.
After considering numerous potential ways to address the Debtors’ debt structure and liquidity issues, Avenue’s board of directors determined that it was appropriate to wind down the Debtors’ brick-and-mortar operations prior to, and during, the chapter 11 cases. Accordingly, during July 2019, the Debtors commenced store closing sales at thirty-two of their underperforming retail locations and took steps to retain an agent to oversee and implement store closing sales at the Debtors’ remaining locations.
Financial Condition
The Debtors’ prepetition funded debt structure primarily consists of (i) the prepetition ABL facility and (ii) the prepetition subordinated note. On April 12, 2019, Debtors Ornatus Holdings and Ornatus GC entered into a revolving credit and security agreement with PNC Bank, National Association (“PNC“). The prepetition ABL facility permits borrowings of up to $45 million, including a first-in, last-out loan tranche (the “FILO Loan“) of $6 million, which can increase by an additional $4 million during the period commencing on December 1 of each year and ending on the last day of February the following year. The prepetition ABL facility is guaranteed by Ornatus RE and it secured by a first-priority lien. Amounts due under the FILO Loan are also guaranteed by affiliates of the Debtors’ equity holders.
As of the Petition Date, the aggregate amount of all obligations outstanding under the prepetition ABL facility was no less than (a) $15,262,763.08, consisting of revolving advances outstanding under the prepetition ABL credit agreement, plus interest accrued and accruing thereon, plus (b) outstanding letters of credit in the aggregate amount of $1,006,246.23, plus (c) accrued and accruing fees, plus (d) all accrued and accruing costs and expenses, plus (e) all accrued and accruing charges and obligations in respect of cash management products and services, plus (f) any other charges and liabilities accrued, accruing or chargeable.
On July 22, 2019, the prepetition ABL agent issued a notice of event of default and imposition of default rate of interest. At the same time, the prepetition ABL agent implemented a cash dominion structure whereby all cash held in the Debtors’ store deposit and collections accounts with PNC are swept on a daily basis to pay down the prepetition ABL facility.
On or about April 12, 2019, Ornatus Holdings issued a master subordinated note in favor of Ornatus URG Funding, LLC, an affiliate of the Debtors’ equity holders, which secured a loan in the principal amount of approximately $38,394.840. The prepetition subordinated note is guaranteed by Avenue, Ornatus GC, and Ornatus RE and is collateralized by a security interest in the collateral. The prepetition subordinated note bears interest at a rate of 15% per annum. The prepetition subordinated note replaced the master subordinated note dated as of December 13, 2017, totalling approximately $34,044,840; inclusive of letters of credit totalling $12 million, provided a new cash advance of $3,700,000 and capitalized certain outstanding fees and expenses owed by the Debtors. The prepetition subordinated note allows additional funds to be advanced from time to time to support the Debtors’ business operations. From October 2018 through April 2019, capital infusions were provided to the Debtors in the amount of approximately $25.2 million, consisting of approximately $14.2 million funded directly to the Debtors and $11 million in letters of credit provided for the Debtors’ benefit, and deferred or funded certain expenses on behalf of the Debtors in the aggregate amount of approximately $2.1 million. As of the Petition Date, the prepetition subordinated lender asserts that no less than $38,903,531.80 was due under the prepetition subordinated note.
Motion for DIP Financing
The Debtors are seeking authority to obtain post-petition loans, advances and other financial accommodations on an interim basis from PNC as DIP agent, under or in connection with the revolving DIP facility in an aggregate amount up to $12 million secured by first-priority perfected security interests in and liens, senior and above all other liens, upon all of the DIP collateral.
Proceeds of the DIP Facility will be used for the payment of certain expenditures, in accordance with the terms of the budget, the DIP credit agreement, and the proposed orders, including: (a) payment, in whole or in part, at the discretion of the DIP Agent, the prepetition obligations, subject to entry of the final order; (b) paying fees, costs and expenses required to be paid pursuant to the DIP credit agreement; (c) general operating and working capital needs in accordance with the budget; (d) funding the carve-out in accordance with the budget; (e) paying for allowed professional and statutory fees allocated to the Debtors during the chapter 11 cases in accordance with the budget; and (f) paying certain prepetition obligations in accordance with the budget.
Significant First Day Motions
Store Closing Sales Motion
The Debtors are seeking interim and final orders authorizing the Debtors to assume the agency agreement dated as of August 9, 2019, by and between Avenue Stores, LLC and its affiliates, on the one hand, and a contractual joint venture composed of Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC. The Debtors are also seeking authority to conduct store closing or similar themed sales in accordance with the terms of the agency agreement and store closing sale guidelines as well as the payment of customary retention bonuses to employees at the remaining closing stores. All sales will be free and clear of all liens, claims, and encumbrances.
The Debtors retained Configure Partners, LLC to serve as the Debtors’ investment banker. As of the Petition Date, Configure had contacted more than seventy parties to solicit interest in purchasing the Debtors’ e-commerce business assets. After evaluating interest expressed by potential purchasers, the Debtors intend to commence a bidding and sale process for, among things, their e-commerce business, inventory stored in their Texas Facility and their intellectual property. Despite the interest to date expressed in the going concern assets, a stalking horse purchaser has not yet emerged. The Debtors, with the assistance of Configure, are continuing to engage with potential purchasers of the going concern assets.
In the event that the Debtors either (a) do not secure an indication of interest for the going concern assets by September 14, 2019, or, in the event a letter of intent is obtained, (b) do not also secure a stalking horse bid for such assets by September 24, 2019, the e-commerce business inventory will be liquidated by the agent on the terms set forth in the agency agreement and the Debtors will initiate a standalone sale process for their intellectual property.
Critical Vendors Motion
The Debtors seek entry of interim and final orders authorizing the Debtors to pay certain prepetition claims of critical vendors in the ordinary course of business in an amount not to exceed $250,000 on an interim basis and $500,000 on a final basis. The Debtors’ critical vendors provide marketing, sales reconciliation, customer relationship management, and technology infrastructure services that are vital to the Debtors’ day-to-day operations
Wages and Benefits Motion
The Debtors are seeking entry of interim and final orders authorizing the Debtors to pay prepetition wages and other obligations in the ordinary course of business in an amount not to exceed $3,034,000. The total amount of prepetition gross semi-monthly payroll was approximately $800,000. The Debtors’ aggregate gross weekly payroll for all employees was approximately $1,000,000. The Debtors believe that, as of the Petition Date, approximately $1,265,000 was earned but remains outstanding on account of accrued prepetition wages and salaries. In addition, as of the Petition Date, the Debtors owed approximately $230,000 in unpaid obligations on account of independent contractors.
The Debtors are also seeking authority to continue their bonus and incentive programs. The aggregate amount outstanding as of the Petition Date is approximately $85,100. Employees are also directly or indirectly reimbursed for certain expenses incurred in the scope of their employment. In addition, certain employees used corporate credit cards for business expenses. On average, the Debtors paid American Express approximately $150,000 per month on account of the AMEX cards. The Debtors are seeking authority to pay any prepetition obligations that may have accrued but have not yet been paid on account of the AMEX cards in an amount not to exceed $15,000.
In addition to the AMEX cards, the Debtors offer certain employees the use of fuel cards through Wex, Inc. Each card has a $150 daily limit. The Debtors pay approximately $4,500 per month on account of the fuel cards, and approximately $5,520 remains outstanding as of the Petition Date. The Debtors are seeking authority to pay all outstanding employee expenses incurred in connection with the AMEX cards and fuel cards in an amount not to exceed $79,800.
In connection with employee withholdings, the Debtors are seeking authority to pay the following amounts:
Healthcare Programs:
Dental Insurance: $25,000
Vision Insurance: $8,050
Insurance Coverage: $103,500
Disability Insurance: $28,750
COBRA: $750
Flexible Spending: $4,600
The Debtors are also seeking authorization to continue their vacation and leave policies in the ordinary course of business. As of the Petition Date, approximately $770,000 has accrued in connection with the policies. In connection with the Debtors’ retirement plan, the Debtors estimate that approximately $41,400 remains outstanding, including matching contributions. Finally, in connection with the Debtors’ workers’ compensation program and state-sponsored workers’ compensation programs, the Debtors estimate that they owe approximately $6,900 in respect of these benefits.
As of the Petition Date, the Debtors employed approximately 791 full-time employees and 1,14 part-time employees.
Insurance Programs Motion
The Debtors seek entry of interim and final orders authorizing the Debtors to maintain and administer their prepetition insurance policies, pay or honor obligations arising under or in connection with their insurance policies, including prepetition obligations arising in the ordinary course of business, and continue the insurance premium financing program and renew or enter into new premium financing programs, as necessary.
The total annual premiums under the current insurance policies were approximately $1,037,479. The Debtors finance approximately $463,465 of those premiums. The remainder of premiums is paid to the relevant insurance carriers either as annual prepayments or as instalment payments. The estimated prepetition amount owing to the insurance carriers is $57,795. The Debtors are also seeking authority to continue the policies in the ordinary course of business and to pay prepetition premiums for the policies in an amount not to exceed $66,465.
Taxes and Fees Motion
The Debtors seek entry of interim and final orders authorizing the Debtors to pay prepetition tax and fee obligations in an amount not to exceed $1,600,000 on an interim basis and $1,800,000 on a final basis. The Debtors are seeking authority to pay all prepetition taxes and fees in the aggregate amount not to exceed $2,002,000, subject to the $980,000 cap provided for in the interim order.
As of the Petition Date, the Debtors estimate that they owe approximately $2,002,000 in unremitted taxes and fees, which are comprised entirely of current tax obligations.
Customer Programs Motion
The Debtors seek entry of interim and final orders authorizing the Debtors to administer and maintain customer-related programs in the ordinary course of business. The customer programs included gift cards, refund and exchange program, promotional offers, and the Avenue credit card program. The Debtors incur approximately $75,000 annual in fees and costs associated with the gift card program. The Debtors do not intend to offer gift cards for purchase at their retail locations subject to store closing sales but seek authority to continue to sell gift cards and e-gift cards through their website. The gift cards do not expire. The Debtors allow their customers to return or exchange regular or promotional merchandise for any reason within sixty days of original purchase. Merchandise returned with a receipt within sixty days of purchase may be returned for cash or credited to the creditor card or gift card used for payment. The Debtors allow their customers to exchange merchandise without a receipt or, alternatively, they may issue their customs a merchandise card which is used to issue store credit. The Debtors’ books and records reflect an aggregate net liability in respect of the gift card program and merchandise cards of approximately $2.6 million. The Debtors are seeking authority to honour all gift cards, e-gift cards, and merchandise cards issued prior to the Petition Date in an amount not to exceed $10,350.
Throughout the year, the Debtors offer various promotional offers to customers to drive sales and maintain competitiveness. The Debtors are seeking authority to continue offering these promotions post-petition in the ordinary course of business.
The Debtors offer private label credit cards to their eligible customers, which are issued and administered by Comenity Bank. There were 335,000 active Avenue credit card accounts as of the Petition Date. During the fiscal year 2018, the Debtors generated approximately $124 million in sales under the credit card program.
Shippers and Warehouseman Motion
The Debtors seek entry of interim and final orders authorizing the Debtors to pay prepetition shipping, freight forwarding, warehouseman, lien claimants, and customs duties in an amount not to exceed $710,000 on an interim basis and $1.87 million on an aggregate final basis. In the ordinary course of business, the Debtors historically received – and continue to receive – merchandise sold at their retail locations into their distribution facilities in Troy, Ohio (the “Ohio Facility”) and Dallas, Texas (the “Texas Facility”). The Ohio Facility was historically used to store inventory sold at the Debtors’ retail locations and was surrendered prior to the Petition Date. Through a separate motion, the Debtors are seeking to reject the underlying lease for the Ohio Facility effective as of the Petition Date. The Texas Facility is operated and controlled by a third-party, FB Flurry LLC and is used to store inventory sold through the Debtors’ e-commerce platforms and distributed directly to online purchasers. In addition to FB Flurry, the Debtors use the services of certain other third-party distribution facilities, distributors, and logistics providers as part of their distribution network.
The shippers and warehouseman are owed approximately $1,775,000 on account of prepetition claims. Postpetition, merchandize that is received from overseas will be shipped to applicable ports in the United States, cleared for customs, and ultimately moved on to trucks for transportation to the Texas Facility. The Debtors are required to pay customs duty charges. As of the Petition Date, the Debtors believe there was approximately $95,000 owed for customs duty charges, which must be satisfied before applicable inventory is released and forwarded to the Texas Facility. To maximize proceeds realized from the store closing sales and maintain brand value through their e-commerce platform, the Debtors will require the continued cooperation of, and assistance from, the shippers, the warehousemen, customs agencies, and related parties.
Taxes and Fees Motion
The Debtors seek entry of interim and final orders authorizing the Debtors to pay prepetition tax and fee obligations in an amount not to exceed $1,600,000 on an interim basis and $1,800,000 on a final basis. The Debtors are seeking authority to pay all prepetition taxes and fees in the aggregate amount not to exceed $2,002,000, subject to the $980,000 cap provided for in the interim order.
As of the Petition Date, the Debtors estimate that they owe approximately $2,002,000 in unremitted taxes and fees, which are comprised entirely of current tax obligations.