By Jeff Montgomery

Law360 (July 6, 2020, 10:01 AM EDT) -- Newly bankrupt apparel retail chain Lucky Brand Dungarees LLC secured approval Monday for a $15.6 million debtor-in-possession loan, after pandemic-driven store shutdowns pushed the company into Chapter 11 in Delaware on Friday with $182 million in secured debt.

U.S. Bankruptcy Judge Christopher S. Sontchi approved the bankruptcy financing DIP loan during the chain's initial hearing on its filing and plan to sell the business, which has more than 200 stores across 43 states, either through a bidder-to-beat stalking horse sale or through an intellectual property sale and liquidation.

The company's initial sale option relies on a $192 million bid from a stalking horse venture led by SPARC Group LLC, an apparel company operating under the Aeropostale and Nautica brands. SPARC is in turn owned by Authentic Brands Group LLC as well as Simon Property Group, a Lucky landlord and one of its largest unsecured creditors.

Judge Sontchi approved the DIP terms after rejecting objections from Sri Lanka-based supplier Hirdaramani International Exports (Pvt.) Ltd., owed $5.9 million and ranked as Lucky Brand's second-largest unsecured creditor. Hirdaramani argued that insiders were significant parties in the debtor's plan, and said unsecured creditors would be better off under a case alternative calling for an intellectual property sale and asset liquidation.

"This case is not required to be run, nor will it be, for the benefit of one constituency. General unsecured trade vendors are one piece," Judge Sontchi said, adding that he did not see any of the provisions of the DIP loan as "alarming."

Lucky Brand designs, markets, sells, distributes and licenses fashion apparel, operating 112 specialty stores and 98 outlets in North America. Much of the 30-year-old fashion venture's equity and a share of its secured debt is held by interests of private equity investment firm Leonard Green & Partners LP.

Mark A. Renzi, managing director of Berkeley Research Group LLC and Lucky's chief restructuring officer, said in a case-opening declaration that the business had been struggling with a heavy debt load and exploring restructuring options prior to companywide shutdowns prompted by the COVID-19 emergency.

Despite support from lenders and other stakeholders, "the company's restructuring efforts were derailed by a combination of the economic impact of the global COVID-19 pandemic, which resulted in extended closures of its retail stores, and limited liquidity, which diminished access to new inventory from its vendors," Renzi said.

The company's current capital and debt structure includes $49.3 million owed under a first lien term loan and $61.3 million revolving credit agreement held by Wells Fargo Bank NA and Gordon Brothers Finance Co. LLC. Also owed is $45.58 million under a second lien term loan held by affiliates of Lantern Capital Partners and Hilco Merchant Resources LLC and $16.8 million due under a second lien term loan administered by an affiliate of Leonard Green.

SPARC's stalking horse bid includes $141.1 million in cash, a $51.5 million credit bid, or debt takeback, and other unspecified consideration.

ABG, described as a brand development, marketing and entertainment company, will pay for and acquire some Lucky assets under the SPARC offer, as will a group of second lien lenders and lenders, who also agreed to supply the $15.6 million DIP loan.

Critical to the case was a first lien lender group's agreement to the use of debtor cash reserved as first lien loan collateral cash to pay for some of the company's needs during the case, according to Ted A. Dillman of Latham & Watkins LLP, counsel to Lucky Brand and its four affiliates.

"One thing that is important to understand from the get-go is that the cash collateral usage and junior DIP financing are part of a package deal," Dillman said.

Payouts from the collateral, he said, "are conditioned on the DIP lenders putting in money behind them" under terms that make the DIP loan junior to the first lien lender claims but senior to the second lien lender claims. Also a part of the deal, Dillman said, was a lender agreement to set aside sale proceeds sufficient to wind down the remaining estate and close the case.

As a fallback, the company has proposed a sale of intellectual property to ABG that would provide Lucky with $90 million. The buyer also would have an option to acquire inventory associated with Lucky's e-commerce and wholesale business, accounts receivable and other remaining assets.

Renzi said the stalking horse offer "preserves much of the company's business as a going concern," including much or all of its present retail footprint and the employment of many of the 2,700 of its more than 3,000 workers temporarily furloughed when mass store closings began in March.

Lucky's six largest unsecured creditors are owed about $40.5 million. The top group is led by Anguilla-based merchandise supplier Red & Blue International Ltd., owed $13.5 million, and includes landlord Simon Property Group, owed $4.6 million.

"Although some of the stalking horse parties have prepetition connections to the debtors, the approval and negotiation of the stalking horse bid and the stalking horse purchase agreement was within the sole authority" of the special committee and independent director named to investigate the transactions, the company said in its initial declaration.

Private equity firm Leonard Green acquired the Lucky Brand business from Kate Spade & Co. in 2014, with the company refinancing its debt in 2015, 2016 and late 2019.

Lucky Brand and its affiliates are represented by Michael R. Nestor, Kara Hammond, Andrew L. Magaziner and Joseph M. Mulvihill of Young Conaway Stargatt & Taylor LLP and George A. Davis, Ted A. Dillman and Lisa K. Lansio of Latham & Watkins LLP.

Hirdaramani International Exports (Pvt.) Ltd. is represented by Victor A. Sahn and Mark S. Horoupian of SulmeyerKupetz PC.

The case is In re: Lucky Brand Dungarees LLC et al., case number 1:20-bk-11768, in the U.S. Bankruptcy Court for the District of Delaware.

--Editing by Marygrace Murphy.

Update: This story has been updated with information from Lucky Brand's initial hearing.

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