By Rick Archer

Law360 (May 19, 2020, 8:31 PM EDT) -- Licensing business Centric Brands on Tuesday asked a New York bankruptcy court for permission to to walk away from dozens of stores full of merchandise and its contract with fashion brand BCBG as it tries to trim $700 million in debt and survive the COVID-19 pandemic.

At the telephonic hearing, U.S. Bankruptcy Judge Sean Lane approved the deal Centric had struck to end its licensing agreement with BCBG but said the lease rejection would have to wait until the next hearing after counsel for some landlords said they haven't confirmed the company had returned their keys yet.

"Facts get messy when there really hasn't been enough time to button things down," he said.

Centric — whose portfolio of licenses includes Calvin Klein, Timberland and Disney — filed for Chapter 11 Monday, saying it had struck a deal to swap $700 million in debt for equity as it struggles to deal with the COVID-19 pandemic.

At the hearing, Centric counsel Gregg Galardi said with $1.7 billion in debt the company was "highly leveraged" but making its loan payments when it "hit a wall" when the coronavirus shut down the factories that make its licensed clothing and the retail outlets that sell it.

He said the company was unable to find replacements for its shuttered suppliers on short notice, and although it was still receiving orders from Walmart, Target and Costco, that revenue stream was not enough. Centric furloughed about 1,300 employees, instituted a 20% across the board pay cut and about six weeks ago began restructuring talks, he said.

Under the restructuring support agreement described in Centric's court filings, investment firm Blackstone will exchange second-lien debt for equity. Senior lenders Ares Capital Management and HPS Investment Partners LLC will retain their positions and receive equity interests as well.

The company said Ares, HPS and Blackstone had agreed to provide $435 million in debtor-in-possession financing, and Judge Lane approved the DIP order on an interim basis.

Galardi said the crisis had led Centric — which had operated 96 retail stores — to rethink its retail footprint and as a result the company was seeking permission to reject 61 leases for both retail and office locations effective on the petition date and abandon any property at the locations.

"We found it was cost-prohibitive to get that property," he said.

However, after hearing from counsel representing landlords argue they had been unable to confirm Centric had turned over control or find out what property was being abandoned, Judge Lane postponed hearing the motion, saying the rejection of the leases could be made retroactive.

Judge Lane did approve the rejection of Centric's licencing agreement with BCBG, which Galardi said BCBG agreed to after Centric agreed to pay $1.3 million plus royalties on Centric's sales of its remaining BCBG inventory.

Centric's Chapter 11 declaration touts the company as "one of the world's leading lifestyle brand collectives," designing, making and marketing clothing and accessories for more than 100 brand names as well as making private-label clothing for sale through its own website or at 96 U.S. stores. The company said that prior to April it had more than 2,100 employees in the U.S.

Centric is represented by Gregg M. Galardi, Cristine Pirro Schwarzman, Daniel G. Egan and Emily Kehoe of Ropes & Gray LLP.

Landlords at the hearing were represented by Leslie C. Heilman and Laurel D. Roglen of Ballard Spahr LLP and Scott A. Zuber of Chiesa Shahinian & Giantomasi PC

The case is In re: Centric Brands Inc. et al., case number 20-22637, in the U.S. Bankruptcy Court for the Southern District of New York.

--Editing by Stephen Berg.

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