Creative Hairdressers Inc.

April 23, 2020

Creative Hairdressers Inc., otherwise known to many as “Hair Cuttery,” filed for bankruptcy earlier this week in the District of Maryland; it is an independent family-owned chain of hair salons with 800 locations across approximately 15 states; it was also a $40mm revenue business in fiscal year 2019 (ended September ‘19).

While its revenues are impressive, the company faced intensified competition in the industry that took a toll on operating performance. Accordingly, months prior to this filing, it reduced its footprint by closing underperforming stores, refocused services around hot areas (i.e., hair coloring) and changed its professional commission structure. These changes were beginning to have a positive impact. Nevertheless, the company tripped a covenant default with its secured lender which triggered a year-long sale process that ultimately proved unsuccessful. The company’s original founders, the Ratners, subsequently sank money into the business for working capital to keep the business afloat.

And then COVID-19 hit. Forced closures precipitated an immediate liquidity crisis and the company had no choice but to furlough its employees. Liquidity drained to near zero and the Ratners again stepped up with a $4mm pledge to the company’s pre-petition lenders, HC Salon Holdings Inc. Employees, however, were left hanging as liquidity proved insufficient to cover the last payroll prior to closure.

Speaking of stepping up, HC Salon Holdings Inc. has agreed to purchase substantially all of the company’s assets; it will assume liabilities, credit bid its debt, and pay cash amounts necessary to wind down the remainder of the business. HC Salon also committed to a $40.675mm DIP (which is primarily a roll-up … $5mm is new money) and agreed to the use of its cash collateral. An immediate use of these DIP proceeds would be to true-up the employees who were — due to the extenuating circumstances — shafted prior to the filing.

Three more things to note:

First, the company hopes to wrap up the sale by the end of May with the closing scheduled to be held at the Maryland offices of DLA Piper US LLP, counsel to the credit bidder. The company is actually based in Virginia, though its affiliate, Ratner Companies LLC, is Maryland-based. So, there’s nothing particularly shady about venue held in Maryland. This did make us wonder though: is there any chance that venue considerations will be somewhat influenced by COVID-19 and where states lift restrictions? We’re guessing generally ‘no’ because the law will dictate venue as usual but we could see instances on the margins where parties in interest consider alternative venues with the hope of getting parties together, getting due diligence done, and maximizing value. We’ll see.

And, second, the company is intends to use the latest bankruptcy technology: the “Mothball Motion" where it asks the bankruptcy court to use its wide discretionary authority under section 105 of the Bankruptcy Code to limit post-petition rent payments to landlords, adjourn non-essential motions, and more. This is the new IT thing in bankruptcy cases, people. Let’s see how long it lasts now that certain states are starting to loosen restrictions.

Finally, the company has already filed a motion seeking to reject 49 leases. Prior to filing, it obtained rent concessions for approximately 100 leases. The world of hurt that is about to shake out in commercial real estate is going to be interesting to watch.

• Jurisdiction: D. of Maryland (Judge Catliota)

• Capital Structure: $36.4mm (+ $4.1mm LOC)(HC Salon Holdings Inc.)

• Professionals:

  • Legal: Shapiro Sher Guinot & Sandler (Joel Sher, Richard Goldberg, Daniel Zeller, Anastasia McCusker)

  • Financial Advisor: Carl Marks Advisory Group LLC (Marc Pfefferle)

  • Real Estate Advisor: A&G Realty Partners LLC

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

• Other Parties in Interest:

  • Pre-Petition Lender & Stalking Horse Purchaser: HC Salon Holdings Inc.

    • Legal: DLA Piper US LLP (Richard Chesley, Jamila Justine Willis)