Rubie’s Costume Company Inc.

April 30, 2020

Star Wars. Marvel’s Avengers. Stranger Things. You’d think any business associated with this hot IP would be killing it. And yet it seems that even the Black Panther is susceptible to poor business fundamentals in a disrupted retail environment.

New York-based Rubie’s Costume Company Inc. and five affiliates (the “debtors”) — designers, manufacturers and distributors of costumes and related accessories — filed for bankruptcy in the Eastern District of New York. The debtors have non-exclusive licenses with the likes of Disney Inc. ($DIS), Lucasfilm, Marvel and others as well as non-licensed costumes for all of your not-just-Halloween costume needs (nobody is judging, people). They sell via 4 costume stores in New York, online, and wholesale channels; they count Target Inc. ($TGT), Walmart Inc. ($WMT), Amazon Inc. ($AMZN) and Party City Holdco Inc. ($PRTY) as distribution channels (the latter, itself, in trouble).

The debtors note that operating performance has been on the decline for years, attributing this primarily to “[i]ndependent customers hav[ing] declined and the average order per existing customer also ha[ving] declined.” Disruption! The small mom and pop costume shops are getting smoked while the bigbox retailers who have more leverage over pricing take over. We’re willing to bet that even Party City will attribute its recent travails to the rise of the bigbox retailer coupled with “The Amazon Effect.” The debtors highlight:

For the fiscal year ending December 31, 2018 (“FY 2018”) net sales and Adjusted EBITDA were approximately $310 million and $2 million, respectively. As a result of the decline in independent customers, for fiscal year ending December 31, 2019 (“FY 2019”), the Company generated net sales and Adjusted EBITDA of approximately $268 million ($42 million decline) and $3 million ($5 million decline), respectively.

The debtors also have over $47mm of secured debt outstanding under its pre-petition credit agreement with lenders such as HSBC Bank USA NA, Bank of America NA, Wells Fargo Bank NA, JP Morgan Chase Bank NA, TD Bank NA, and Citibank NA (the “Bank Group”). Operating under a series of forbearance agreements, the debtors have been engaged in an operational cost-cutting process since 2019.

Forbearances (accompanied, of course, with enhanced collateral packages and fees) and cost-cutting can only get you so far, of course. With COVID-19 hitting, the debtors suffered from a liquidity crunch. After all, we’re not hearing much about Zoom-costume-parties. The Bank Group has apparently taken a look at the debtors’ business prospects and said, “no way, Jose.” Per the debtors:

…the COVID crisis has had an impact on the Debtors’ ability to obtain new financing from the Bank Group. The Bank Group has declined to provide continued financing and the Debtors’ efforts to obtain replacement financing on an asset based lending structure have been slowed by the crisis.

Indeed, Wells Fargo Bank NA pulled out of refi discussions — a move consistent with Wells’ recent savagely escapist approach with respect to retail.

It advised the Debtors that its decision was based on the conditions in the global lending market due to the COVID-19 crisis and internal restrictions on its current lending, and was not a reflection on the Debtors’ creditworthiness.

Yeah, maybe.

The Debtors demonstrated the viability of their business to the Banks in a number of ways including through the business plan implemented over the last year with the assistance of BDO, the continued value of their inventory which exceeds the debt owed to the Banks and even most recently the fact that major national account clients placed firm orders for the Halloween season.

While we don’t find this particularly convincing either, Wells didn’t really need a pretense to bail out of retail these days.

Anyway, here we are. Without the refinancing, the debtors are in bankruptcy court seeking the use of cash collateral while they use the bankruptcy process to find a new source of capital.

• Jurisdiction: E.D. of New York (Judge Trust)

• Capital Structure: $46.7mm RCF

• Professionals:

  • Legal: Togut Segal & Segal LLP (Frank Oswald, Brian Moore) & Meyer Suozzi English & Klein PC (Edward LoBello, Howard Kleinberg, Jordan Weiss)

  • Financial Advisor: BDO USA LLP

  • Investment Banker: SSG Capital Advisors LLC

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

• Other Parties in Interest:

  • Pre-petition Agent: HSBC

    • Legal: Phillips Lytle LLP (William Brown)