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Payless Files Chapter 11, Wells Fargo Agents DIP Commitment

April 05, 2017, 07:14 AM
Filed Under: Bankruptcy

Retail footwear giant Payless ShoeSource filed a voluntary petition for reorganization pursuant to Chapter 11 of the U.S. Federal Bankruptcy Code on April 4.

The company’s North American entities, as well as two foreign Hong Kong-based entities involved in logistics (CBL) and supply chain (DAL), are included in the restructuring, which has been filed in the U.S. Bankruptcy Court for the Eastern District of Missouri in St. Louis. Payless is also filing for recognition of the U.S. Chapter 11 proceedings under Part IV of the companies’ creditors Arrangement Act in the Ontario Superior Court of Justice. Payless will continue to operate its business in the ordinary course in terms of its customers, vendors, partners and employees.

In conjunction with the restructuring, Payless has entered into a Plan Support Agreement (PSA) with parties who hold or control approximately two-thirds of its first lien and second lien term debt to reduce its debt load by almost 50%, materially lower its annual cash interest costs, access significant additional capital and provide a path to an expedited emergence from Chapter 11 with a sustainable capital structure for the future. Under this agreed plan with its lenders, Payless intends to use the Chapter 11 process to accomplish specific objectives:

  • Strengthen its balance sheet and restructure Payless’ debt load;
  • Invest in specific areas that Payless believes will provide sustainable growth including omnichannel expansion; product and inventory initiatives; and international expansion in Latin America and elsewhere; and
  • Optimize its store footprint, with the immediate closure of nearly 400 underperforming locations in the U.S. and Puerto Rico and work to aggressively manage the remaining real estate lease portfolio either by modifying terms, or evaluating closures of additional locations.

The company is promptly seeking immediate relief from the Court though the filing of customary first day motions that will allow the company to smoothly transition its business into Chapter 11, including, among other things, granting authority to pay pre-filing wages, salaries, benefits, honor customer programs, and pay vendors/suppliers in the ordinary course for all goods and services provided on or after the filing date.

Additionally, Payless has negotiated agreements with certain of its existing lenders to provide Payless access of up to $385 million of debtor-in-possession financing, which includes access to $305 million of ABL financing and up to $80 million of new term loan financing. In total, the debtor-in-possession financing will provide Payless with access to up to $120 million in incremental liquidity during the Chapter 11 cases. Wells Fargo Bank is listed in court documents as collateral agent and administrative agent.

This incremental liquidity will ensure that suppliers and other business partners/vendors will be paid in a timely manner for authorized goods and services provided during the Chapter 11 process, in accordance with customary terms. The $80 million of new term loan financing will also ensure the company has the exit financing required to emerge from Chapter 11 well positioned for future growth and profitability post-restructuring.

Paul Jones, Payless Chief Executive Officer, commented, “This is a difficult, but necessary, decision driven by the continued challenges of the retail environment, which will only intensify. We will build a stronger Payless for our customers, vendors and suppliers, associates, business partners and other stakeholders through this process. While we have had to make many tough choices, we appreciate the substantial support we have received from our lenders, who share our belief that we have a unique opportunity to enable Payless — the iconic American footwear retailer with one of the best-recognized global brands — to remain the go-to shoe store for customers in America and around the globe.”

“We are confident that this process will also enable us to leverage Payless’s existing strengths to succeed,” continued Jones. “These strengths include our ability to produce significant free cash flow and, even last year, flat EBITDA despite unprecedented challenges and in contrast to many retailers; our portfolio of strong proprietary brands, along with unique licensing agreements with premier brands and partners; our best-in-class design and sourcing capabilities that enable the Company to offer customers high quality products at a significant discount to peers; our strong and growing Latin American business, and a lean and scalable franchise model for other markets.”

Payless has retained Kirkland & Ellis as its legal advisor, Guggenheim Securities as its investment banker and financial advisor and Alvarez & Marsal as its restructuring advisor.

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