By Rose Krebs

Law360 (May 7, 2020, 7:47 PM EDT) -- A Delaware judge gave the go-ahead for menswear retailer John Varvatos Enterprises Inc. to tap into its up to roughly $20 million in post-petition financing to fund operations in its Chapter 11, despite raising some concerns with certain financing provisions.

During a hearing held via telephone to consider the retailer's first-day motions, U.S. Bankruptcy Judge Mary F. Walrath said she believes the debtor in possession financing, which will be provided by an affiliate of private equity firm Lion Capital LLP, is absolutely necessary for the company to continue operations as it pursues plans for a Chapter 11 sale.

Although Judge Walrath echoed concerns raised by certain stakeholders about some of Lion Capital-affiliated secured junior debt being rolled up into the DIP financing, she would sign off on the funds since the DIP will still be subordinated to senior secured debt.

Debtors' attorney Derek C. Abbott of Morris Nichols Arsht & Tunnell LLP said the DIP is set to be drawn in two installments, with $6.8 million to be used immediately on an interim basis and the other $13.6 million to be drawn later. The proportion of prepetition debt to be rolled into each DIP installment will differ, he added.

Abbott acknowledged the financing is "a little unusual in that it is a junior DIP" with the Lion affiliate set to lend with its recovery still subordinated to Well Fargo NA, the administrator for the company's roughly $20 million in senior secured debt. Wells Fargo's counsel told the judge the secured lender supports the DIP.

As Judge Walrath granted approval for various other first-day motions, including continued payment of wages, insurance, and utility costs, Abbott conceded the menswear company will need to keep things lean as it moves forward in Chapter 11.

"I need to be quite candid, this is a tight case," Abbott said, adding that there may not be a Chapter 11 plan filed in the case and that unsecured creditors will likely only see a "modest" recovery if any at all.

John Varvatos Enterprises hit Chapter 11 on Wednesday with plans to sell its assets as store closures caused by the coronavirus outbreak spiraled the already struggling retailer into bankruptcy. The luxury menswear brand, founded in 2000 by American designer John Varvatos, entered Chapter 11 with a stalking horse credit bid in place from a Lion Capital affiliate to use $76 million of debt it is owed to buy the assets, according to court filings.

That floor bid, which also includes assumption of certain liabilities, is still subject to being beaten by other potential buyers.

As with the rest of the retail industry, John Varvatos Enterprises was hard-hit by store closures caused by the coronavirus pandemic, the company said in a statement.

"In the months immediately preceding the pandemic, John Varvatos Enterprises established a talented new executive leadership team," the statement said. "In response to the rapid and exponential spread of COVID-19 as well as relevant governmental orders, the company's leadership took difficult yet prudent steps to temporarily close all store locations and conserve cash."

The John Varvatos brand, which "fuses contemporary style with a 'rock 'n' roll' culture," according to a first-day declaration of company Chief Financial Officer Joseph Zorda, was founded by Varvatos, the former head menswear designer for Calvin Klein.

According to Zorda's declaration, the company has in recent years "experienced consistent declines in retail and e-commerce revenues as a result of certain cost-cutting measures that involved altering the brand's clothing to attract customers in the mass market, which did not resonate with the brand's existing customers."

Also, certain wholesalers ended their relationship with the brand, and retail chain Nordstrom partially removed the John Varvatos brand from its stores in 2018, the declaration said.

Last year, John Varvatos Enterprises made changes to its leadership team, looked to sell certain assets, and attempted to negotiate rent reductions. The sale and lease negotiations were unsuccessful.

With a new CEO in place at the end of 2019 tasked with trying to turn the company's financial prospects around, the company said it started to see some promising results early in 2020.

However, the COVID-19 outbreak in the United States and "the resulting, state-imposed limitations and prohibitions on nonessential retail operations destroyed the debtors' blossoming success," the declaration said.

Forced to rely almost exclusively on its e-commerce business, the company has not been able to keep up with its rent and debt payments, Zorda said.

John Varvatos Enterprises Inc. and two affiliates hit Chapter 11 with roughly $20 million in debt owed on the credit agreement administered by Wells Fargo, $95 million owed in secured notes to Lion affiliates, and roughly $26 million in unsecured debt. The company also has three foreign affiliates that are not included as debtors in the Chapter 11.

The John Varvatos brand is sold through various collections, including namesake John Varvatos Collection and John Varvatos Star U.S.A., the declaration said. It includes suits, jackets and waistcoats, jeans, jewelry, boots and leather jackets. The company sells its merchandise through its website and 27 brick-and-mortar locations, according to the declaration.

John Varvatos Enterprises Inc. is represented by Derek C. Abbott, Matthew O. Talmo and Andrew R. Workman of Morris Nichols Arsht & Tunnell LLP.

Lion Capital LLP's affiliate is represented by James L. Bromley and David R. Zylberberg of Sullivan & Cromwell LLP and Pauline K. Morgan and Sean T. Greecher of Young Conaway Stargatt & Taylor LLP.

Wells Fargo is represented by J. Cory Falgowski of Burr & Forman LLP and Donald E. Rothman, Brendan C. Recupero and Paul D. Bekker of Riemer & Braunstein LLP.

The case is In re: John Varvatos Enterprises Inc. et al., case number 1:20-bk-11043, in the U.S. Bankruptcy Court for the District of Delaware.

--Editing by John Campbell.

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