💥Forever 81. Million.💥

Forever 21 Gets a Landlord Bailout

The bid deadline in the Forever 21 Inc. bankruptcy cases has come and gone and, well, the stalking horse bidders — a consortium between Simon Property Group Inc. ($SPG), Brookfield Property Partners LP and Authentic Brands Group LLC — won the day. The debtors filed a “notice of suspended auction” on Sunday that says it all:

The headline purchase price figure therefore remains $81mm for the distressed retailer (though, counting liabilities like costs to cure defaults, etc., the bankers assert the total deal is worth approximately $290mm). As indicated in the image above, the hearing to approve the sale is set for Tuesday, February 11 at 9am in the Delaware bankruptcy court.

This is not a good result for suppliers who claim they’re owed approximately $347mm, many of whom objected to the bid procedures and proposed sale. While they ultimately wrestled a small concession from the debtors/purchasers on the proposed break-up fee, they were otherwise shut out. Now, even that concession is worthless.

These vendors need to realize: virtually all of these retailers who file for bankruptcy are administratively insolvent on day 1. Forever 21 was supposed to be different. It wasn’t.

Indeed, in December, Bloomberg reported that the debtors were underperforming heading into the holiday season; that exit financing avenues were foreclosing; and that all hopes of a reorganization via its filed plan were going out the window. Indeed, we later learned that the debtors were in default under their DIP credit facility (heads up, academics). All of this precipitated the pivot to a quick sale.

Take a look at the debtors’ operating performance and it’s easier to understand the lender skittishness and strategic pivot. On October 15, 2019, the debtors filed their 13-week DIP budget wherein they projected $722.3mm in total receipts from the petition date through December 21, 2019. Actual receipts, however, totaled only $705.3mm through January 4, 2020. For the math challenged, that’s a $17mm underperformance against budget — EVEN WITH THE BENEFIT OF AN ADDITIONAL TWO WEEKS THAT SUBSUMED THE CRITICAL HOLIDAY SHOPPING PERIOD. This is yet another case where projections didn’t comport with reality: while the projections showed steadily increasing weekly receipts throughout the holiday period, the reality is that people simply didn’t shop at Forever 21 as much as anticipated. Despite millions upon millions of professional fees, this is still a business very much in need of an actual “turnaround” to survive (PETITION Note: the fees reflected below, for the most part, only cover the cases through the end of October).* The high fees further necessitated a quick sale.

SPG and ABG clearly think they are best positioned to ride out an option here. The purchase price is cheap, and there are other benefits that only, as landlord, SPG can derive (i.e., continued rent, full boxes, less in-line tenant risk, etc.). We’ve seen this movie before and it was called Aeropostale.

Here’s what SPG CEO David Simon had to say last week about Aeropostale:

…our cash investment in Aero OpCo was approximately $25 million. We have already received $13 million of distributions, so I have $12 million of cash invested in Aero OpCo. At the time we bought it, it was producing a negative EBITDA of $100 million and had over 500 stores. Today, today, we expect Aero OpCo to produce EBITDA pre-royalty from 575 stores of approximately $80 million of EBITDA.

We believe Aero is approximately, if you put a market multiple on it $350 million today and our ownership is 50%. 12 to three -- to 50% of $350 million. That's the math.

This was a private equity deal, complete with dividends. Only, unlike private equity firms, SPG has a residual interest in maintaining the AERO enterprise as its success directly contributes to the success of its other tenants. This is PE+.

Of course, SPG also has an investment in ABG. Here’s what Simon said about that:

Now with respect to ABG we invested -- we made a recent investment in it. So we have a total of 600 -- or sorry $67 million in ABG, Authentic Brands Group. At the time of our original investment, which was roughly $33 million, ABG produced EBITDA of approximately $150 million. Today our value is worth $190 million of our $67 million and ABG is expected to produce EBITDA well north of $350 million and the value is growing every day.

This means that, indirectly, SPG also owns Barney’s New York and Nine West, among other brands that have wound their way into bankruptcy courts near you.

With respect to Forever 21, he added:

…we have recently participated with Brookfield and Authentic Brands Group on behalf of the NewCo, SPAR Group, F21, LLC in a stocking horse bid for certain assets and liabilities in a going concern transaction under Section 363 of the Bankruptcy Code. Our Group's successful turnaround of Aero after climbing out of bankruptcy in 2016 gives us confidence with our ability to do the same with Forever 21.

Forever 21 is a storied and well -- widely recognized brand with over $2 billion in global sales. We believe F21 similar to Aero presents a very interesting repositioning opportunity. If the transaction is consummated the newco contemplates the continued operations of many of Forever 21 stores and e-commerce business and maintaining many jobs.

Our interest in the new venture will be approximately 50%. The aggregate purchase price -- acquisition price is approximately $81 million, plus the assumption of certain ongoing operating liabilities.

Again, this is a private equity deal. He continued:

We would not have done Aero and we're -- and we would not be attempting to do Forever 21 for the sole purpose of maintaining our rent. And that's the biggest misnomer out there when I read various publications and analyst notes and media notes. We do it -- we make these investments for the sole purpose of we think there's a return on investment.

Now the fact of the matter is we did all this that Aero and the reality is they kept paying us rent. So that's like -- that's obviously beneficial and I don't want to understate that but that's not why we do it. At the same time with F21, we do think there is a business there, but it's got to be turned around. And I'm not going to project today to you what those numbers are, but we've got our work ahead of us.

But if we are successful in turning around, we will make money at F21 and we'll get paid our rent.

It’s interesting. SPG is beta-testing, in real time, becoming a retail-focused venture and private equity firm. If retail continues to get decimated, we’ll see the extent of their ability to scoop up brands/businesses on the cheap. It seems safe to presume that its portfolio will be larger in a few years than it is now.

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*Which is not to say that good work hasn’t been done. As we noted on Twitter here, the debtors, with the help of their advisors, closed 102 stores (creating $91mm of rent relief), reduced operational costs of $100mm, and sold two warehouses for $37mm (the proceeds of which were used to pay down a portion of the DIP credit facility).

Still — and we write this knowing we harp on professional fees a lot — the DIP budget line-itemed $25.1mm for professional fees in the first 13 weeks of the case. According to the most recent operating report, the debtors are already at $11.97mm and that’s really only accounting for the end of October. Query whether 7+ weeks of work topped the budgeted delta of $13.13mm? 🤔

⚡️Update: Forever21 Inc.⚡️

Forever21 Inc. is forever filing motions to reject sh*t. On Friday, the company followed up its Store Closing Motion (which, itself, had two supplements) with its fourth rejection motion of non-residential real property leases. By our count, somewhere between 100-150 different lease (or sublease, as the case may be…looking at you Belk Inc.) counterparties have been affected now by the bankruptcy. That’s a lot of landlords and lessors looking for tenants and subtenants, respectively.

Who is bearing the brunt of this? By our count (in approximate numbers):

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⚡️Update: CBL & Associates Properties Inc.⚡️

In our recent newsletter, “🇺🇸Forever 21: Living the (American) Dream🇺🇸,” we highlighted the exposure that landlords have to Forever21:

The company currently spends $450mm in annual rent, spread across 12.2mm total square feet. The company will close 178 stores in the US and 350 in total.

We highlighted how the company noted the impact this plan will have on large mall landlords, the company said:

Forever 21’s management team and its advisors worked with its largest landlords to right size its geographic footprint. Four landlords hold almost 50 percent of its lease portfolio. To date, Forever 21 and its landlords have engaged in productive negotiations but have not yet reached a resolution.

Two of those landlords were the largest unsecured creditors, Simon Property Group ($SPG) and Brookfield Property Partners ($BPY). But another, CBL & Associates Properties Inc. ($CBL), also has exposure. In “Thanos Snaps, Retail Disappears,” we discussed CBL’s issues: bankruptcy-related store closures are something that CBL is very familiar with. Management said last February that things were going to turn around but, instead, things just keep getting worse as more and more retailers go out of business.

Forever 21 is one of CBL’s top tenants, occupying 19 stores (plus 1 store in “redevelopment phase”). Per CBL’s FY 2018 10-K, Forever 21 accounts for roughly 1.2% of CBL’s revenue or $10 million.

Of those 20 stores, 7 are subsumed by a motion by Forever 21 to enter into a consulting agreement to close stores (see bankruptcy docket (#81 Exhibit A):

On October 14, 2019, partly due Forever 21’s bankruptcy, Moody’s downgraded CBL’s corporate family rating to B2 from Baa3 and revised its outlook to negative. Moody’s explained:

CBL's cushion on its bond covenant compliance is modest, particularly the debt service test, which requires consolidated income to debt service to annual debt service charge to be greater than 1.50x. The ratio has declined from 2.46x at year-end 2018 to 2.27x at Q1 2019, and 2.25x at Q2 2019 due principally to declining operating income during these periods. CBL's same-center NOI growth was -5.3% for Q2 2019 YTD and CBL projected same-center NOI growth to be between -7.75% and -6.25% for 2019, which means that the debt service test will likely weaken further.

The chart below reflects the company’s capital structure and debt prices. It is not doing well. In fact, the term loan and the unsecured notes have priced down considerably since March:

Here is the company's stock performance:

The last thing CBL needed — on the heals of the downgrade — was near-instantaneous bad news. It got it this week.

Yesterday, the bankruptcy court granted interim approval authorizing Destination Maternity Corporation ($DEST) to assume a consulting agreement with Gordon Brothers Retail Partners LLC. Gordon Brothers will be tasked with multiple phases of store closures. Among those implicated? CBL, of course:

CBL is landlord to DEST on 16 properties that are slated for rejection. Considering that DEST cops to being party to above-market leases, this ought to result in a real economic hit to CBL as (a) it will lose a high-paying tenant, (b) it will take time to replace those boxes, and (c) it is highly unlikely to obtain tenants at as favorable rents.

Let’s pour one out for CBL, folks. The hits just keep on coming.

🇺🇸Forever 21: Living the (American) Dream🇺🇸

Back in June we kicked off coverage of Forever 21 Inc. with “💥Nothing in Retail is "Forever💥".

Never include in your company name "Forever", "Long Term (Capital)", or "Amaranth (Capital)" (flower that never dies). https://t.co/9P6T8ylE9z

— Nassim Nicholas Taleb (@nntaleb) September 30, 2019

We then issued quick follow-ups in “💥Fast Forward: Forever21 is a Hot Mess💥” and “🍩Forever21 is Forever F*cking Up.🍩”

@Forever21 has filed for bankruptcy in Delaware. $275mm ABL DIP and $75mm TL DIP. Major landlords are big creditors. $SPG for $8mm. Guess that Cheetos partnership couldn’t save the day. pic.twitter.com/mhWVJSGYpx

— 💥PETITION💥 (@petition) September 30, 2019

Forgive us, then, for feeling like the company’s inevitable bankruptcy filing — which happened earlier this week — was a wee bit anticlimactic. After all, we all knew it was coming. As such, we felt the need to crank up some Kanye West to help get us through this additional coverage…

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What you doing in the club on a Thursday?
She say she only here for her girl birthday
They ordered champagne but still look thirsty
Rock Forever 21 but just turned thirty — Kanye West in “Bound 2”

Just kidding, y’all. Kanye is garbage. We don’t listen to Kanye.*

Anyway, we’ve talked time and time again about how the papers that accompany a company’s chapter 11 bankruptcy petition are a perfect opportunity for a company to frame the narrative for the judge, parties in interest, the media and more. A company’s First Day Declaration, in particular, is the bankruptcy equivalent of home field advantage. Coupled with the first day hearing — usually held within a day or two of the bankruptcy filing — a debtor can leverage the First Day Declaration and the opportunity to present first to a courtroom to gain some sympathy from the judge for their current predicament and plant the seeds in the judge’s ears as to the direction of the case.

Except, over time, the judges must begin to get bored. After all, repetitive themes begin to emerge when you track bankruptcy cases. Themes like “the retail apocalypse.” Blah blah blah. The “Amazon Effect.” Oh, f*ck off. Disruption overcame the business! Zzzzzzz. Private equity is evil because they dividended themselves all of the company’s value! Yawn. There’s too much debt on the balance sheet! Typical. The lenders won’t play ball! Mmmm hmmm. The prior management was corrupt AF. Yup, it happens. Weather this year was uncharacteristically bad. Riiiight…that’s retail excuse-making 101.

And, so, it was with great excitement that we read that the Forever 21 bankruptcy stemmed from…wait for it…the American Dream. That’s right, the American Dream.

In other words, this is a story about unbridled ambition and optimism.

*****

Here’s the short version: two immigrants came to this country in the early 80s from South Korea. They had nothing; they worked hard; they sought out opportunity:

During his time as a gas station attendant, Mr. Chang took notice of the customers that drove the most luxurious cars—the customers working in the garment industry. This realization piqued Mr. Chang’s interest. He recognized that together with his wife, they were perfectly suited to enter the fashion industry. This would enable the couple to capitalize on Mr. Chang’s relationship-building prowess and Mrs. Chang’s keen sense of fashion.

Putting aside how shady the notion of your gas station attendant creeping on you is, this is pretty amazing sh*t.

Mrs. Chang, and her nearly-clairvoyant ability to predict trends, were part of the catalyst that boosted Forever 21’s upswing.

Take note, people: this is the kind of pandering you should get when you pay $1,600/hour.

Anyway, over the years, the Changs built a business that employed tens of thousands of people and generated billions in sales. The Changs put their two daughters through ivy league schools and they subsequently joined the family business. This is a beautiful story, folks. Especially so in today’s fraught political environment where immigration remains a hot button issue. Together, as a family, the Changs grew this company to be a behemoth:

And therein lies the rub. The company went from 7 international stores in 2005 to 251 by 2015.

Unfortunately, this rapid international expansion challenged Forever 21’s single supply chain and the styles failed to resonate over time across other continents despite its initial success.

It appears that the same entrepreneurial spirit that allowed the Changs to conquer the US led them astray internationally. Indeed, those European and Asian adventures — and the Chang daughters’ vanity project, Riley Rose — proved to be too costly. As you can see, while the domestic business has been in decline,** it still shows some promise. The international business, on the other hand, has really sucked the air out of the business⬇️.

Sure, aside from the international issue, some of the usual excuses exist. Mall traffic is down. Not enough attention to e-commerce. Product assortment could have been better. The company had borrowing base issues under its asset-backed loan. Yada yada yada. But this doesn’t appear to be the absolute train wreck that other recent retailers have been. At least not yet.

So what now?

At the first day hearing, company counsel spared us any in-court singing,*** but did rely on some not-particularly-complex imagery. He said the company’s predicament is like a puzzle and that, to paraphrase, you sometimes just need to get all of the pieces to fit.

Those pieces are:

The Footprint. Right-sizing the business by shuttering underperforming locations, domestically and internationally. The company currently spends $450mm in annual rent, spread across 12.2mm total square feet. The company will close 178 stores in the US and 350 in total. In other words, the company is mostly erasing its overzealous expansion; it will focus on selling cheaply made crap to Americans and our southern friends down in Latin America rather than poisoning the clothes racks in Canada, Europe and Asia. The new footprint will be around 600 stores. Or, at least, that’s the plan for now. Let’s pour one out for the landlords. Here is CNBC mapping out where all of the closures are and which landlords are hit the most. Also per CNBC:

“At one point, two of Forever 21′s largest landlords, Simon Property Group and Brookfield Property Partners, were trying to come up with a restructuring deal where they would take a stake in the company to keep it afloat. It would’ve been similar to when Simon and GGP, which is now owned by Brookfield, bought teen apparel retailer Aeropostale out of bankruptcy back in 2016. But talks between Forever 21 and its landlords fell through, according to a person familiar with the talks. Simon and Brookfield are listed in court papers as two of Forever 21′s biggest unsecured creditors. Simon is owed $8.1 million, while Brookfield is owed $5.3 million, and Macerich $2.7 million.”

Only one of the locations marked for closure, however, belongs to Simon Property Group ($SPG).

The company notes:

To assist with the initial component of the strategy, Forever 21’s management team and its advisors worked with its largest landlords to right size its geographic footprint. Four landlords hold almost 50 percent of its lease portfolio. To date, Forever 21 and its landlords have engaged in productive negotiations but have not yet reached a resolution. The parties have exchanged proposals and diligence is ongoing. Forever 21 looks forward to continuing to work with its landlords to reach a mutually agreeable resolution and proceeding through these chapter 11 cases with the landlords’ support.

In tandem with these negotiations, Forever 21 and its advisors met with nearly all of its individual landlords to discuss potential postpetition rent concessions and other relief on a landlord-by-landlord basis. Many of these smaller, individual negotiations proved more fruitful than negotiations with the larger landlords. Although Forever 21 has not finalized the terms of a holistic landlord deal as of the Petition Date, Forever 21 anticipates that good-faith negotiations with its landlord constituency will continue postpetition, and that all parties will work together to reach a consensual, value-maximizing transaction.

Company counsel asserts that, for landlords, Forever 21 is “too big to fail.” This kinda feels like this:

But don’t worry: the A Malls are totally fine. 

And don’t worry about the loans (CMBX) at all. Noooooo.

As per Morgan Stanley, “In total, we identify 89 loans with a balance of $9.8bn with exposure to announced Forever 21 store closures.”

— Danielle DiMartino (@DiMartinoBooth) October 1, 2019

Merchandising. Getting “Back-to-Basics” on the merchandising front and focus on the company’s “core customer base.” Here is Bloomberg’s Jordyn Holman casting some shade on this plan. And here is Bloomberg’s Sarah Halzack. While the bankruptcy papers certainly don’t highlight the competition, bankruptcy counsel made a point of highlighting H&M, Zara and Fashion Nova. Retail Dive writes:

‘They did not grow with their target customer and the Millennials have graduated to Zara & H&M,’ Shawn Grain Carter, professor of fashion business management at the Fashion Institute of Technology, told Retail Dive in an email. ‘Gen. Z is more interested in rental fashion and vintage hand-me-downs because they are more environmentally conscious.’

Interestingly, Stitch Fix Inc. ($SFIX) was up 5% on Monday while the RealReal Inc. ($REAL) was up 15%. (PETITION Note: both got clobbered on Tuesday, but so did everything else).

The Washington Post piles on:

“Slimming down the operation and reducing costs is only one part of the battle,” Neil Saunders, managing director of GlobalData Retail, said in a note to clients. “The long-term survival of Forever 21 relies on the chain creating a sustainable and differentiated brand. This is something that will be very difficult to accomplish in a crowded and competitive sector.

Indeed, we’ve been writing for some time now that fast fashion seems out of sorts. Going “back to basics” may not actually be the right move in the end.

🤔

Vendor Management. A quick digression: back in May, we wrote about Modell’s Sporting Goods avoidance of bankruptcy. Mr. Modell himself worked the phones and reassured most of his vendors, prompting them to continue doing business with the shrinking sporting goods retailer. This is a feature that you don’t get in PE-backed retail bankruptcies where you have hired guns on management. There, Mr. Modell’s legacy was at stake. He hustled. Likewise, here, the Changs personal business is threatened. Accordingly, the company met with 100 vendors representing 80+% of the vendor base and got them comfortable with continued business; they secured 130 vendor support agreements for equal or better terms. Everyone is invested in making a viable go of the ‘19 holiday season. Sometimes it pays to have someone who is truly invested be all over the supply chain.

Financing. The company’s capital structure is rather simple:

The ABL is with JPMorgan Chase Bank NA as agent. The term loans were provided by the family. One from Do Won Chang for $10mm and the second from the Linda Inhee Chang 2012 Trust. Because nothing says “American Dream” like raiding your kid’s trust fund.

In conjunction with the bankruptcy, the company proposed a DIP credit facility in the form of (a) a $275 million senior secured super-priority ABL revolving credit facility, which includes a $75 million sub-limit for letters of credit and a “creeping roll up” of the pre-petition ABL Facility, and (b) a $75 million senior secured super-priority term loan credit facility, reflecting $75 million of new money financing. The company sought access to $60mm of the term loan at the hearing, indicating that with $40mm due in rent and $18mm in payroll, it would run out of cash without it. The judge approved this request.

And so here we are. The company intends to march forward with negotiations with its landlords, close tons of locations, sure up the vendor base, locate exit financing, and get this sucker out of bankruptcy in Q1 next year.

Ending up in bankruptcy certainly isn’t part of the American Dream. But living long enough to fight another day might just be.

*H/t to @JordynJournals, retail reporter for Bloomberg News on this.

**The company notes that domestic sales have increased over the last 4 quarters.

***For those new to PETITION, the same lawyer from Kirkland & Ellis LLP that represents Forever 21 represented Toys R Us. In the now-infamous “first day” hearing in Toys, the attorney sang the Toys R Us jingle — “I don’t want to grow up…” — in the courtroom. Suffice it to say considering the outcome of that case, that tactic didn’t particularly age well. Indeed, this will age better, we reckon (won’t play in email, only in browser):

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📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We recently added “Super Pumped: The Battle for Uber” by Mike Isaac, which we blew through rather quickly. Next up on our list: “What it Takes: Lessons in the Pursuit of Excellence” by Stephen A. Schwarzman, “The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company” by Bob Iger, and “That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea,” by Netflix co-founder Marc Randolph.

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💰New Opportunities💰

PETITION LLC lands in the inbox of thousands of bankers, advisors, lawyers, investors and others every week. Our website(s) are visited by thousands more. Are you looking for quality people. Posting your job opportunities with PETITION is a great way for your listing to stand out from the LKDN muck.

Email us at petition@petition11.com and write “Opportunities” in the subject line if you’re interested in information about posting your opportunities with us.

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Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.

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🍩Forever21 is Forever F*cking Up🍩

On one hand, you have to respect the desire to sure up liquidity by entering into partnerships. On the other hand, well this:

Forever 21's online customers are opening packages to find the plus-size clothing they ordered—and an Atkins diet bar that they most certainly did not. https://t.co/09QLuL9ejs

— Tracy Clark-Flory (@TracyClarkFlory) July 23, 2019

Updated with a statement from Forever 21. pic.twitter.com/PdY2FkU3jm

— Tracy Clark-Flory (@TracyClarkFlory) July 23, 2019

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☄️Future First Day Declaration: Forever21☄️

We figured we'd take the first crack at the First Day Declaration for Forever21 Inc.'s potential bankruptcy* and spare the company some professional fees.

******
"Preliminary Statement in Support of Forever21's Chapter 11 Petition"

As you know, retail sucks. The list of bankrupted retailers is long and “iconic” and so we got FOMO and decided, what the heck! Everyone’s failing, so we might as well also!

But first, we did want to make sure that we could explain to our uber-loyal fanbase (who clearly isn’t buying enough of our sh*t) that we did everything in our power to stay out of bankruptcy court. And so we did what all retailers today do: we focused on omni-channel; upped our Insta spend; updated the lighting in our stores and refurbished our “look”; stretched our vendors; sh*tcanned some employees; negotiated extensively with our landlords; closed a few underperforming locations; negotiated with our lenders, and more! According to Bloomberg, we’ve hired Latham & Watkins LLP to deal with this hot mess, including our $500mm asset-backed loan. We’ve been busy bees!!

We had one Hail Mary trick up our sleeves that we thought would really save the business: partnerships. With first class brands. Like Cheetos. That’s right Cheetos!! GET PUMPED!!! Everything is so 🔥🔥🔥.

This sh*t got ~45k likes (“worst things since the Kardashians!” haha). Which pales compared to this doozy, which got ~47k likes:

“This is the most ridiculous clothing line I’ve ever seen.”

Nothing drives sales sales sales like thoughts of “ball cheese” (PETITION Note: sorry…we had to). #Fail.

But, wait! There’s more. We brought back Baby Phat too!!

Me copping my Baby Phat online because you couldn’t pay me to rifle through the chaotic hellscape that is a Forever 21 store 💁🏾‍♀️💅🏾 pic.twitter.com/vgOvnxdQpW

— 🗣AmustbetheMANI (@AmustbetheMANI) June 12, 2019

Good news: Baby Phat is back!
Bad News: It’s at Forever 21 next to the Cheeto T-shirt’s. pic.twitter.com/ynby7zGUl9

— BStylez✨ (@IAmBStylez) June 12, 2019

May G-d have mercy on all of us.

*Sources tell us that the company may not be as close to a bankruptcy filing as some previous media reporting implied. Nevertheless, the name has been kicking around for some time now within the lender community and it does appear that the company is focused on some operational fixes. This “mock” first day declaration should not be construed as indicating that a bankruptcy is, in fact, imminent.