Fleetwood Acquisition Corp.

November 4, 2019

Pennsylvania-based Fleetwood Acquisition Corp. and two affiliated debtors, Fleetwood Industries Inc. and High Country Millwork Inc., filed for bankruptcy in the District of Delaware. The filing constitutes a “second order effect” bankruptcy in that, according to the debtors, it results primarily from two dominant macroeconomic trends entirely outside of their own control: (i) the #retailapocalypse; and (ii) President Trump’s trade war with China. As we’ll discuss below, the filing will have uniquely American ramifications — at least for a participant in retail business.

Fleetwood Industries and High Country Millwork Inc. are “providers of customized fixtures and displays” primarily servicing the retail and hospitality industries; they are “full service fixturing companies beginning with creative and collaborative design services and continuing through the manufacturing and installation processes.” Said another way, they design, build, install and service display shelving, casing and checkout infrastructure that you look at and use whenever you go shopping. You probably never even think about who makes that stuff and how lucrative it might be: interestingly, in 2018, the business had $70mm in sales. The debtors list scores of retailers as clients including, ominously, Destination Maternity, Gymboree, JC Penney, Quiksilver, and True Religion, among many others (including, to be fair, relatively “healthy” retailers…to the extent those exist).

And that’s where the rubber meets the road. It’s hard for companies servicing retailers to generate growth when…well…not to state the obvious…retail is CLEARLY not in growth mode.

Tariffs didn’t help. Per the debtors:

…in 2019 as a result of the certain tariffs instituted against China and other headwinds in the retail industry, certain of the Debtors’ customers began delaying orders, significantly extending project timelines, and slow paying certain receivables. At the same time, the Debtors’ overhead expenses increased due to the Fleetwood expansion and certain of the materials utilized by the Debtors became more expensive due to the tariffs.

They continue:

…some of the Debtors’ customers unexpectedly began delaying orders and pushing out project timelines. Many of those customers are retailers who reported that the newly instituted China tariffs were negatively impacting their sales and profit margin projections. This, in turn, led such customers to slow their store expansion and refurbishment plans, defer new projects indefinitely, and reduce the scope of existing projects. This caused a significant decline in the Debtors’ revenue. Indeed, the Debtors project a combined decline of approximately 50% in revenues from 2018 to 2019.

We’re not math experts but if revenue was $70mm in 2018, we’re talking a $35mm nut in 2019. 😬

Customers also began to delay payment or to challenge invoices in unusual ways, presumably to address their own cash flow issues. At the same time, the Debtors’ liabilities to suppliers and internal overhead ballooned as the Debtors continued to work to fulfill customer orders for which payment was now being delayed or withheld.

This is called death dominos, ladies and gentlemen. Retailers are stretching payables and that’s stressing players further down the chain. Consequently, these guys sh*tcanned 63 employees across the enterprise, delayed capex, and starting negotiating revised credit terms and extended payment plans with their suppliers. And this is where the “uniquely American ramifications” come in. This isn’t Payless Shoesource where virtually all of the companies biggest creditors were in China; rather, the debtors’ top 30 list of general unsecured creditors is replete with good ol’ USA-based businesses (PA, CA, NY, OR, etc.). With cash projected to hover between $1.3mm and $2.2mm over the next 13 weeks, things aren’t looking so great for those folks (absent inclusion among the critical vendors line-itemed for $320k/week through the end of November). There’s $60mm of secured debt on top of them. The debtors’ prepetition secured lenders consent to the use of cash collateral to fund the cases but make no mistake about this: the debtors aren’t in good shape. They checked administrative insolvency on their filing petitions. So, yeah, there’s that: the value of this company likely doesn’t clear the debt.

So, what’s the bankruptcy going to achieve? Note:

Over the past several months, the Debtors have actively sought financing to support their working capital and cash demands, including seeking additional financing from their senior lender, equipment finance companies, accounts receivable factoring lenders, and other potential asset-based and cashflow lenders, but none of those lenders were able to underwrite or approve a loan due to the Debtors’ current financial condition and the industry outlook. The Debtors also recently explored potential business combination opportunities that might result in a stronger combined balance sheet. These discussions did not present a path forward and one of the potential partners actually ceased its own operations after suffering the same challenges. (emphasis added)

Again, dominos. Savage. The most obvious answer — which the debtors acknowledge — is that the debtors needed the “breathing spell” provided by the automatic stay. They’ll use the bankruptcy process to “liquidate certain inventory, raw materials, and equipment at their Pennsylvania location.” Otherwise, they’ll attempt to “right-size and streamline their businesses with the goal of emerging as a profitable enterprise.” They don’t give any indication of how they’ll do it. No doubt, though, both the debtors’ lenders and their unsecured creditors will take it on the chin.

Anything that even touches retail these days is a hot mess.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: $51.2mm (RCF & TL - Fixture Holdings LP c/o Grey Mountain Partners), $9.8mm Term Loan (Brookside Mezzanine Fund III LP), $8.7mm subordinated unsecured debt (Fixture Holdings LP)

• Professionals:

  • Legal: Bayard PA (Erin Fay, Evan Miller, Daniel Brogan)

  • CRO: Octavio Diaz

  • Director: Christopher Reef

  • Claims Agent: Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

  • Prepetition Secured Lender: Fixture Holdings LP

    • Legal: Paul Hastings LP (Matthew Murphy, Nathan Gimpel)