Elliott Greenleaf New Chapter 11 – In re: Specialty Retail Shops Holding Corp

Introduction

On January 16, 2019, (the “Petition Date”), Specialty Retail Shops Holding Corp., Pamida Stores Operating Co., LLC, Pamida Transportation LLC, Penn-Daniels, LLC, Place’s Associates’ Expansion, LLC, Retained R/E SPE, LLC, Shopko Finance, LLC, ShopKo Gift Card Co., LLC, ShopKo Holding Company, LLC, ShopKo Institutional Care Services Co., LLC, ShopKo Optical Manufacturing, LLC, ShopKo Properties, LLC, ShopKo Stores Operating Co., LLC, SVS Trucking, LLC, (the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Nebraska. 

The Debtors are represented by Kirkland & Ellis LLP, as lead counsel, and McGrath North Mullin & Kratz, P.C., as local counsel. The case has been assigned to the Honorable Thomas L. Saladino. A hearing on the Debtors’ first day motions was held on January 16, 2019. A meeting to form the Official Committee of Unsecured Creditors has not yet been scheduled.

Background

Headquartered in Green Bay, Wisconsin, the Debtors offer a broad assortment of name brand and private brand merchandise, including clothing and accessories, electronics, and home furnishings, as well as Debtor-operated pharmacy and optical services departments. The Debtors operate over 300 general merchandise stores throughout the Midwestern, Northwestern, and Southwestern regions of the United States, and employ over 15,000 individuals. 

Through various court filings, the Debtors indicate that they have encountered financial difficulty due to the general shift away from brick-and-mortar stores to online retail channels. In addition, the Debtors have struggled against other established retailers, such as Walmart and Target.

Financial Condition 

As of the Petition Date, the Debtors have approximately $440 million in total funded debt obligations.

Wells Fargo Bank, N.A. (“Wells Fargo”) and Spirit Realty L.P. (“Spirit”) are owed approximately $327 million and $30 million in two senior secured asset-based revolving loans with maturity dates of June 2020. In addition, Wells Fargo and Spirit are owed $49 million and $34.4 million under two asset-based term loans with maturity dates of June 2020.

Motion for DIP Financing

The Debtors are seeking authority to enter into a Debtor-in-Possession facility with Wells Fargo that will provide post-petition financing, in the amount of $480 million on a final basis.

Prepackaged Plan

The Debtors are seeking to enter into a prepackaged plan of reorganization (the “Plan”). The Plan contemplates value-maximizing transactions that will significantly deliver the Debtors’ balance sheet. If the equitization restructuring occurs, general unsecured claims will receive its pro rata share of either 80.1% of the new Debtors’ interests or its pro rata share of the general unsecured creditors’ equitization distribution in one or more distributions. If the sale occurs, general unsecured creditors will receive its pro rata share after all other distributions have been made.

Pharmaceutical Bidding Procedures and Sale Motion

The Debtors are seeking approval of a sale of their pharmacy assets that were not sold prepetition. The Debtors believe the sale of their pharmacy assets are crucial in order to avoid a reduction in the recoveries received from the sale of the pharmacy assets to the detriment of all parties in interest. An order approving the pharmaceutical bidding procedures set the following deadlines:

Bid Deadline – January 21, 2019, at 4:00 pm (CT)

Auction – January 23, 2019, at 9:00 am (CT)

Transaction Objection Deadline – January 25, 2019, at 4:00 pm (CT)

Reply Deadline – January 28, 2019, at 1:00 pm (CT)

Sale Hearing – January 28, 2019, at 1:00 pm (CT)

Store Closing Motion

The Debtors are seeking to assume a consulting agreement with Gordon Brothers Retail Partners (“Gordon Brothers”), and close stores free and clear of all liens, claims and encumbrances. The Debtors seek to close and wind down up to forty-one underperforming store locations based off factors such as historical store profitability, recent sales trends, the geographic market in which the store is located, the potential to realize negotiated rent reductions with applicable landlords, and specific circumstances related to each store’s performance.

The swift and orderly commencement of the sale will allow the Debtors to timely reject the applicable store leases and, therefore, avoid the accrual of unnecessary administrative expenses for rent payment. Delaying the store closings may cause the Debtors to pay post-petition rent at many of these stores, at a possible cost to the estate of approximately $1.5 to $2.1 million per month. The assumption of the Gordon Brothers’ consulting agreement will allow the Debtors to utilize the experience and resources of Gordon Brothers in performing large-scale liquidations in a format that allows the Debtors to retain control over the sale process.