How Much Risk Will Barneys' Vendors Face?
● The retailer lined up about $218 million in debtor-inpossession financing, but the bulk could be used to pay off secured debts.
Last week in bankruptcy court, Barneys New York's attorneys heralded a roughly $218 million financing arrangement that they said would better position the luxury retailer for a sale, and which they said showed enduring confidence in the brand.
But vendors shipping to Barneys during the bankruptcy proceedings might be treading with caution, as its new debtor-in-financing agreement envisions paying off all its pre-petition secured debt, with some exceptions, according to court filings on Friday. Given the retailer's considerable debt — including at least $190 million in secured obligations — as well as its ongoing lease and other expenses during the
bankruptcy process, vendors may find themselves in a tenuous position, said bankruptcy attorneys.
“If you're a vendor, you really want to dig into the details with Barneys about assurances that you're going to get paid,” said Patrick Collins, a bankruptcy and restructuring partner at Farrell Fritz PC. Collins is not representing anyone in the Barneys case, but is representing creditors, including vendors, in the ongoing Sears Chapter 11 proceedings.
Barneys, which filed for Chapter 11 protection last week, has sought to allay fears by signaling that it will use its new debtor-in-possession financing to maintain operations while looking for a buyer. “We will continue to operate our day-to-day business as usual and we expect to pay vendors in full for goods and services provided on or after Aug. 6, 2019, in the ordinary course,” a company representative said in a statement Monday.
One of the requirements under the bankruptcy court process is for the debtor company to demonstrate that it has obtained the best debtor-in-possession financing terms possible, and Barneys certainly sought to do that.
Over the course of its initial hearing in bankruptcy court before Judge Cecelia Morris in Poughkeepsie, N.Y., Barneys surprised observers with news that it had lined up new financing under more favorable terms. The company had gone into the proceedings with a proposed $75 million in financing led by Hilco Global and Gordon Brothers. But later that day, Barneys revealed it was able to obtain some $218 million in financing from Brigade Capital Management LP and B. Riley Financial Inc.
“The competition to provide Barneys New York with fresh capital — a substantial amount of which is being provided on a junior basis — reinforces our confidence in achieving a value-enhancing transaction,” a representative for Barneys said in a statement Monday.
The new financing does give Barneys a little more time, until Oct. 24, to lock down a buyer. The Hilco financing that it had proposed earlier had set a late September deadline to receive qualified bids.
The unsecured creditors' committee in the Barneys case is still in the process of forming under the U.S. Trustee's direction, and would be able to raise its concerns about new DIP financing terms, albeit during a limited-time window. The next hearing on the Brigade financing is scheduled for Wednesday, according to court documents.
So far, Judge Morris has approved $75 million of the financing, of which Barneys allocated $50 million to pay down some of its pre-petition debt, according to Friday's filings. The retailer will incur more expenses in ongoing lease payments on stores it is keeping open, as well as payments earmarked for so-called critical vendors, that is, those that sell products or services that are essential to the retailer.
“It's legitimate for vendors to express a concern, even with this new financing, about whether Barneys has enough liquidity, and how long this money is going to last to pay for new shipments,” said Collins.
Secured pre-petition debt doesn't necessarily have to be paid off immediately, though it does have an eventual deadline. The bankruptcy code gives secured lenders the right to get their collateral back, or at least its value as of when the court approves the debtor's plan of reorganization. Barneys appears to be paying off its secured debt much sooner, as part of getting the DIP financing it needs to get through the sale process, which isn't unusual, attorneys said.
“Paying down a substantial portion of the secured debt obligations, with the goal of taking out the secured creditors and replacing them with the new lenders, is pretty standard practice in this kind of environment,” said Brett Amron, a business and bankruptcy litigation partner at Bast Amron LLP, who is not involved in the Barneys proceedings.
Vendors may still have some leverage if they're not locked into a contract — they may be free to now negotiate with Barneys to be paid in advance, or be paid cash on delivery, or to be paid within a shorter timeframe than usual.
Unsecured pre-petition debt, like the kind many vendors are still owed from before Barneys filed for bankruptcy, is vulnerable to being unpaid or paid off only in a small part. Barneys owes roughly $100 million in unsecured pre-petition debts to vendors, landlords and others, according to its chief restructuring officer Mohsin Meghji.
But companies' debts after entering into Chapter 11, including the costs of its regular operations and ongoing payments to vendors who are still shipping, generally have to be paid off in full. In order to confirm a bankruptcy plan, the bankrupt company usually has to show that such administrative expenses will be paid, though, of course, that's not always the reality.
If vendors aren't being paid for goods and services they've provided to the company after its Chapter 11 filing, they can file motions in the bankruptcy case for the payment of an "administrative expense.” Such motions don't guarantee that the vendor will get paid in full, because the court usually considers the big picture of how much money is available before approving these requests. But they can at least provide a mechanism for recourse, bankruptcy experts said.
If companies in bankruptcy have significant unpaid expenses from their operations during the bankruptcy, the court could nudge them toward a Chapter 7 liquidation, attorneys said.
“There's an expectation that vendors should be paid for their services during the bankruptcy,” said Collins. “If a company is in bankruptcy, and is not paying its postpetition debts, that's one reason why a bankruptcy judge would convert a Chapter 11 into a Chapter 7.”
From the lenders' perspective, the company needs to look healthy enough to snag a buyer, which means getting products into the stores and trying to maintain business as usual, said Jeff Trexler, associate director of the Fashion Law Institute at Fordham University. But vendors have a different risk calculation to make, he said.
“If I were a vendor, the two questions I'd ask myself right away are, ‘Do I trust them to pay me in the due course of business now?' and ‘Do I want my goods to be part of a liquidation sale?'”