Coldwater Creek files for Chapter 11 Bankruptcy Protection | April 11, 2014
Coldwater Creek and 7 affiliates filed for protection under Chapter 11 of the United States Bankruptcy Code on April 11, 2014 In the United States Bankruptcy Court for the District of Delaware under Case No. 14-10867-BLS-11.
The Debtors in the proceedings (including the last four digits of their respective taxpayer identification numbers) are: Coldwater Creek Inc. (9266), Coldwater Creek U.S. Inc. (8831), Aspenwood Advertising, Inc. (7427), Coldwater Creek The Spa Inc. (7592), Coldwater Rewards Inc. (5382), Coldwater Creek Merchandising & Logistics Inc. (3904), and Coldwater Creek Sourcing Inc. (8530). Debtor Coldwater Sourcing LLC has the following Idaho organizational identification number: W38677.
James A. Bell is the Executive Vice President, Chief Operating Officer and Chief Financial Officer of the above-referenced debtors and debtors in possession (collectively, the “Debtors” or “Coldwater”) and discusses the filing:
“Over the course of the past year, Coldwater engaged in several comprehensive marketing processes and exhaustive efforts to recapitalize the balance sheet, including but not limited to refinancing their debt and an outright sale of the business. The Debtors directly reached out to more than 75 parties during this time and publicly invited strategic alternative proposals of any nature. Having been unsuccessful despite their herculean efforts and in the face of sustained weak business performance, the Debtors have concluded, in consultation with their legal and financial advisors, that pursuing a liquidation through chapter 11 is their most appropriate remaining option. The prepetition secured lenders of the Debtors are supportive of this path. To that end, prior to the Petition Date, the Debtors and the prepetition secured lenders entered into a plan supporting agreement to ensure an orderly and efficient liquidation of the Debtors’ assets.
“Time is of the essence in these chapter 11 cases in order to minimize administrative expenses and therefore, maximize value for all stakeholders. In addition, it is critical that the Debtors commence the liquidation of their inventory prior to what has traditionally been a peak holiday weekend — Mother’s Day. Prior to the Petition Date, the Debtors began soliciting bids from liquidators to carry out store closing sales and otherwise assist in the disposition of the Debtors’ assets. The Debtors now seek to conduct an auction as soon as possible and commence winding down their operations. Furthermore, to facilitate quick and efficient bankruptcy cases, the Debtors filed motions to set a bar date, establish contract and lease rejection procedures, approve the disclosure statement and schedule a confirmation hearing. The Debtors believe proceeding in this manner will allow them to preserve maximum value for their creditors.
The Coldwater Creek Business
“Coldwater has been a multi-channel retailer that offers its merchandise through retail stores across the country, its catalog and its e-commerce website, www.coldwatercreek.com. Originally founded in Sandpoint, Idaho in 1984 as a direct, catalog- based marketer, Coldwater evolved into a multi-channel specialty retailer operating 334 premium retail stores, 31 factory outlet stores and seven day spa locations throughout the United States.
“As of the Petition Date, the Debtors domestically employ a total of approximately 5,990 employees throughout their retail locations, corporate headquarters and distribution, design and call centers. Additionally, approximately 30 employees are employed by a non-debtor affiliate of the Debtors in a foreign registered office based in Hong Kong.
“Historically, Coldwater merchandise has been offered through two distinct operating segments: retail and direct. The retail segment consists of premium retail stores, factory outlet stores and day spas. The direct segment consists of sales generated through Coldwater’s e-commerce website and mobile applications as well as orders taken from customers over the phone and through the mail. This multi-channel approach allowed Coldwater to cross- promote its brand with a consistent message and shopping experience. It also gave Coldwater multiple contact points with customers while providing access to its merchandise and service, regardless of how they prefer to shop. Coldwater’s catalogs were an important part of the Debtors’ business, driving traffic to all channels.
“Coldwater has operated the Coldwater Creek ~ The Spa concept in seven locations. These day spas offer a complete menu of spa treatments, including massages, facials, body treatments, manicures and pedicures. In addition to spa treatments, the day spas carry an assortment of relevant apparel as well as lines of personal care products.
“Coldwater has used its e-commerce website, www.coldwatercreek.com, to cost-effectively reach its customer base and provide another convenient shopping alternative for customers. The website features Coldwater’s entire merchandise offering and serves as an efficient promotional vehicle for the clearance of excess inventory. Coldwater also takes orders from customers over the phone and through the mail using its customer contact center located in Coeur d’Alene, Idaho and Parkersburg, West Virginia.
The Coldwater Creek Capital and Organizational Structure
“The Debtors’ capital structure primarily consists of their obligations under: (a) the Amended and Restated Senior Secured Credit Agreement (the “ABL Credit Agreement”), dated as of May 16, 2011, as amended by that Certain First Amendment to Amended and Restated Credit Agreement dated as of July 9, 2012 by and among Coldwater Creek U.S. Inc., as lead borrower, the other borrowers thereto, the guarantors party thereto and Wells Fargo Bank, National Association, as administrative agent, collateral agent and swingline lender (the “ABL Agent”) and (b) that certain Term Loan Agreement (the “Term Loan Agreement”) dated as of July 9, 2012 by and among Coldwater Creek U.S. Inc., as lead borrower, the other borrowers thereto, the guarantors party thereto, the lenders party thereto and CC Holding Agency Corporation, as administrative and collateral agent (the “Term Loan Agent”).
“The obligations owed by the Debtors under the ABL Credit Agreement are secured by first priority liens over the Debtors’ accounts receivables and inventory and a second priority lien on all of the Debtors’ other assets. The Term Loan Agreement is secured by a second priority lien on accounts receivable and inventory and a first priority lien on all of the Debtors’ other assets in accordance with an Intercreditor Agreement between the ABL Agent and Term Loan Agent dated as of July 9, 2012.
“As of the Petition Date, the Debtors have drawn approximately $37.5 million and have approximately $10 million in letters of credit outstanding pursuant to the ABL Credit Agreement. The outstanding amount due under the Term Loan Agreement as of the Petition Date is approximately $96 million, which includes accrued interest and approximately $23 million representing a prepayment premium payable under the Term Loan Agreement as a result of the acceleration of the obligations under the Term Loan Agreement.
“In addition to the funded debt under the ABL Credit Agreement and the Term Loan Agreement, the Debtors have accumulated a significant amount of accrued and unpaid trade and other unsecured debt in the normal course of their business.
A chart illustrating the Debtors’ organizational structure is below. All of the Debtors are obligated under both the ABL Credit Agreement and the Term Loan Agreement.
Recent Performance and Events Leading to Chapter 11 Cases
“Coldwater reached a peak revenue of $1.1 billion and operating margin of approximately 8% in 2006, with a successful period of store growth from 198 stores in 2005 to 336 stores in 2007. Beginning in 2007, the economic downturn adversely affected the entire retail industry, including Coldwater, and from 2007 to 2011, the Debtors experienced multiple management changes and strategic shifts that, when combined with the Debtors’ unmet sales expectations, led to significant inventory buildup.
“From 2011 through 2013, the Debtors attempted a targeted turnaround process, which focused on the following: (a) incorporating cross-channel discipline into product and creative functions; (b) establishing the foundation of product assortment architecture; acquiring retail-centric talent; (d) developing and implementing a real estate optimization program; (e) positioning the brand strategy to ensure focus on the target customer; and (f) re- engineering design and product development functions.
“In the middle of 2013, the Debtors hired Perella Weinberg Partners LP (“PWP”) to launch a sale process for their entire business. PWP engaged with several potentially interested parties, but Coldwater Creek Inc.’s Board of Directors (the “Board”) ultimately ended the sale process when interest did not surface from an appropriate potential buyer.
“Coincident with the conclusion of the sale process, Coldwater’s business performance started to deteriorate further. At this juncture, the Debtors expanded PWP’s mandate to conduct a broad review of strategic alternatives, including a potential sale of all or part of Coldwater, raising additional capital or a potential refinancing of Coldwater’s existing capital structure to provide additional liquidity to fund the ongoing strategic turnaround.
“Late in 2013, the Debtors became concerned that if they were unable to successfully mitigate significantly accelerating negative sales trends, they may not be able to continue to service their debts and operate their business without implementing a financial restructuring and gaining short-term liquidity. The Debtors’ poor performance continued throughout the holiday season despite significant cost-cutting efforts.
“The outcome of PWP’s broad strategic review was that although there were no interested buyers, there were several refinancing options available to the Debtors. Ultimately, however, the proceeds available under the proposals to refinance the Term Loan were not sufficient to achieve a consensual deleveraging with the Term Loan Agent and the Board terminated the refinancing process.
“During the late 2013 timeframe, Coldwater, with the assistance of its advisors, developed and had begun executing a significantly refined business plan in an effort to return the business to profitability over time. However, despite their significant turnaround efforts, the Debtors have concluded that they are unable to reorganize on a stand-alone basis. After months of declining sales and failed out-of-court sales and refinancing processes, the Debtors have determined that the best way to maximize value for the benefit of all interested parties is a prompt and orderly wind-down of their business. The conclusion to liquidate was reached following a lengthy process in which the Debtors considered and explored all reasonable strategic alternatives.
“In order to liquidate their business as expeditiously as possible, the Debtors filed on the date hereof the Debtors’ Motion for Orders (I)(A) Authorizing Entry into Agency Agreement, (B) Authorizing Bidding Protections, (C) Authorizing Bidding Procedures and Auction and (D) Scheduling Sale Hearing and Approving Notice Thereof, (II) Authorizing Sale of Assets and (B) Store Closing Sales and (III) Granting Related Relief (the “Bidding Procedures and Sale Motion”) seeking, among other things, the authority to grant bidding protections to a stalking horse liquidator, establish bidding procedures for an auction and conduct a hearing on the request to conduct store closing sales and liquidate their inventory through a liquidator. The Debtors believe that commencing the store closing sales prior to Mother’s Day will maximize value for the Debtors’ estates while minimizing the administrative expenses incurred in these chapter 11 cases.
The Proposed Coldwater Creek DIP Financing
“To facilitate an orderly wind-down of the Debtors’ operations in a way that will maximize value for the estates, the ABL Agent has agreed, subject to Court approval, to provide the Debtors with approximately $75 million of senior secured superpriority debtor in possession financing, of which amount approximately $40 million is a “roll-up” of prepetition obligations under the ABL Credit Agreement. The DIP Financing represents the best terms for debtor in possession financing the Debtors were able to arrange following arm’s-length negotiations and a thorough marketing process to third party financiers undertaken by PWP. The liquidity provided by the DIP Financing will allow the Debtors to continue to operate their business until such time as the liquidation can be completed as well as provide for a roll up of the existing borrowings under the ABL Facility.
“The DIP Financing, coupled with cash flow from operations, will permit the Debtors to fund their operations through a controlled and orderly chapter 11 liquidation. Without the DIP Financing, the Debtors will likely experience an immediate liquidity shortfall and will be deprived of the capital necessary to effectuate an orderly wind-down. The DIP Financing will serve to enhance the Debtors’ ability to minimize immediate disruption to their business and instill confidence among employees and service providers and ensure their continued support.
“In the weeks leading to the filing of these chapter 11 cases, PWP contacted 11 potential third-party lenders that are active in the debtor in possession financing market to determine whether they would be interested in providing the Debtors with alternative debtor in possession financing. As part of those efforts, PWP provided certain prospective lenders with details regarding the Debtors’ business, financial overview and current situation and included a summary of the terms of the proposed DIP Financing, a proposed debtor in possession budget, and the Debtors’ long term financial projections. PWP had a number of follow-up discussions with the prospective lenders to discuss these materials and the Debtors’ financial situation. Despite these efforts, the Debtors were unable to obtain any proposals for debtor in possession financing in the form of an unsecured credit repayable as an administrative expense under section 503(b) of the Bankruptcy Code, nor under the terms of sections 364(a) or 364(b) of the Bankruptcy Code.
“Indeed, no third-party lenders indicated that they would be willing to provide postpetition financing to the Debtors on more favorable terms than those provided by the ABL Agent. Accordingly, I and other members of the Debtors’ management and board of directors, in consultation with the Debtors’ financial and legal advisors, determined, in our business judgment, that the terms of the DIP Financing constitute the most cost-effective and advantageous proposal available to the Debtors.
The Proposed Liquidating Plan
“The Debtors have filed the Debtors’ Joint Plan of Liquidation of Coldwater Creek Inc. and its Debtor Affiliates Pursuant to Chapter 11 of the Bankruptcy Code, (the “Plan”) and a related disclosure statement. The Plan provides for the orderly resolution of the Debtors’ operations following the completion of “going out of business” sales and contemplates, among other things, the appointment of a plan administrator to wind-down the Debtors’ estates and make distributions to creditors. The Plan provides for the Term Loan Lender to make funds available from the liquidation of its collateral for the administration of these chapter 11 cases, the wind-down of the Debtors’ business and a distribution to unsecured creditors.
“As evidenced by the Plan Support Agreement, effective as of April 10, 2014 by and among the Debtors, the Term Loan Agent and the ABL Agent and attached hereto as Exhibit A, the Plan is supported by the Debtors’ prepetition secured lenders.
“The filing of the Plan and disclosure statement on the date hereof clearly evidences the necessity for, and the Debtors’ intent to pursue, an expeditious resolution to these cases. To that end, and in addition to the Bidding Procedures and Sale Motion, the Debtors already have filed motions to (a) establish a bar date for unsecured claims, (b) grant procedures for the rejection leases and executory contracts on a rolling basis throughout the chapter 11 cases and (c) approve the disclosure statement, solicit votes and schedule a confirmation hearing.
