January 18, 2019 / 3:54 PM / a month ago

REFILE-Gymboree files for Chapter 11 as more retailers restructure debt

(Clarifies that Neiman Marcus increased its asset-based loan to US$900m in paragraph 21)

By Aaron Weinman

NEW YORK, Jan 23 (LPC) - Children’s retailer Gymboree Group Inc has filed for Chapter 11 bankruptcy protection, joining a growing list of brick-and-mortar retailers trying to restructure their debt under court supervision.

Gymboree will close more stores following its second request for Chapter 11 protection on Thursday. The company shuttered select stores and cut its debt by US$900m after emerging from its first bankruptcy in September 2017.

The retailer has fallen victim to a shift in consumer spending patterns that prioritizes online shopping, which has forced more than 20 US retailers to seek bankruptcy protection since the beginning of 2017.

Merchandise retailer Shopko Stores also arranged up to US$480m in Debtor-In-Possession (DIP) financing this week for its upcoming court-supervised proceedings. Plus-size retailer FULLBEAUTY Brands is also looking to cut US$600m from a US$820m seven-year first-lien term loan B, issued in October 2015, and about US$330m from a US$345m eight-year second-lien facility ahead of a bankruptcy filing, sources said.

“Typically, the fourth quarter is the busiest for retailers, so those companies that want to restructure their debt will take advantage of the slower first quarter, after making it through the holiday season,” said Daniel Lowenthal, a partner at law firm Patterson Belknap Webb & Tyler.

Gymboree has also received commitments for up to US$89m in DIP financing to carry it through a prospective restructuring process that will involve selling its Janie and Jack-branded stores and closing a significant amount of the 900 Gymboree and Crazy 8-branded shops, sources said.

The DIP package comprises US$30m in new money from Goldman Sachs’ affiliate Special Situations Investing Group (SSIG) and Goldman Sachs Specialty Lending Holdings. The rest of the DIP financing is a roll up of Gymboree’s obligations under its pre-petition term loan agreement. SSIG will also act as a stalking horse bidder for the sale of Janie and Jack stores with an US$85m credit bid.

Gymboree declined to comment further on the financing terms.

PRIVATE EQUITY CURSE

Private investor Bain Capital bought Gymboree in 2010 backed by US$1.8bn of leveraged loans and left the retailer with more than US$1bn in obligations, according to LPC data.

Gymboree’s peers that have filed for bankruptcy, including Toys’ R US, Sears, Shopko, David’s Bridal and FULLBEAUTY, have struggled after private equity-backed leveraged buyouts left them ill-equipped to invest in digital customer offerings and tackle debt-laden balance sheets.

Bain Capital also participated in the US$6.6bn buyout of Toys’ R Us in 2005, along with Vornado Realty and KKR, only to see the company close its doors last year. Department store operator Sears this week relied on a last-ditch US$5.2bn bid from billionaire owner Eddie Lampert’s hedge fund ESL to ensure its survival.

“The thinking back through all these private equity retail buyouts was that if you levered up, then equity sponsors could take capital out and make returns work,” said an investor. “The signs of growing internet usage in retail was right there, but it did not stop anyone from lending to them and paying high multiples.”

DIGITAL BATTLE

Retail companies’ digital offerings are fast-becoming a negotiating tool for discussions between the indebted firms and their lenders, which piled into private equity-backed leveraged loans with loose covenants.

Luxury retailer Neiman Marcus came under fire last September when it decided to transfer its online unit MyTheresa to an unrestricted subsidiary of the parent Neiman Marcus Group, shielding it from creditors that wanted to use the e-commerce arm as collateral in restructuring talks.

Neiman Marcus is standing firm over its decision to reallocate MyTheresa, saying that it is within its rights to protect its online arm, but the company faces a court hearing over its decision. Creditor Marble Ridge Capital sued Neiman Marcus in December as it deems the transfer of MyTheresa to be fraudulent.

Neiman Marcus has roughly US$4.7bn in bonds and loans due in the next two years and a potential restructuring could see creditors agreeing to extend the maturities of its debt and increase the coupon on its 8% bond due in 2021, sources said.

“If Neiman Marcus wants a deal they will have to put MyTheresa back,” an investor said, adding that a path forward for the company was to advance asset sales, which could potentially include MyTheresa.

Neiman Marcus’ US$2.8bn outstanding seven-year term loan B, maturing in October 2020, climbed to 86.1 cents on the dollar on Wednesday in the US secondary market, up from 83.5-84.5 in December, a secondary trader said. The loan peaked at 93.84 in mid-September.

Asset manager Ares Management and the Canada Pension Plan Investment Board sold a US$2.95bn seven-year first-lien covenant-lite term loan and an US$800m five-year asset-backed revolving credit facility to back a US$6bn buyout of Neiman Marcus in October 2013. The asset-backed revolver was increased to US$900m in October 2014, according to a company spokesperson. (Reporting by Aaron WeinmanEditing by Tessa Walsh and Jon Methven)

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