The Foothill Ranch, Calif., company and three subsidiaries submitted their petitions in the U.S. Bankruptcy Court for the District of Delaware in Wilmington late on Thursday, Jan. 15.
In a Friday motion, Wet Seal requested permission to tap a $20 million debtor-in-possession loan from B. Riley Financial Inc. so that it could keep the lights on at its remaining open locations and fund its Chapter 11 case. Additionally, Wet Seal hopes to roll up $10.83 million in debt with Bank of America NA into a separate DIP that also would give the debtor $7.5 million in new postpetition financing.
Court papers show B. Riley would sponsor a reorganization plan under which the DIP lender would receive 80% of the reorganized debtor's equity.
"We are pleased to provide financial assistance to The Wet Seal in its efforts to revive this iconic fashion retailer," B. Riley chairman Bryant Riley said in a Friday statement. "Taking a collaborative approach, and tapping our vast array of financial services, we believe that we have developed a financial solution that should benefit all parties involved."
The Los Angeles company owns investment bank B. Riley & Co. LLC as well as Great American Group LLC, which frequently liquidates inventory for bankrupt retailers.
Judge Christopher S. Sontchi has not set a hearing on first-day motions, including requests for joint administration of the cases, interim use of the DIPs, and permission to keep paying employee wages, use its bank accounts and continue certain prepetition customer reward programs.
According to the DIP motion, the B. Riley term loan would be priced at 10.25%, with a 12.25% default interest rate.
The new-money DIP would mature on May 15, unless the company did not win final DIP approval, in which case the financing would mature on Feb. 16.
On the plan's effective date, B. Riley would convert the DIP facility into equity and contribute the balance of the $20 million to Wet Seal in cash. The remaining equity would be handed over to general unsecured creditors, which would not receive a cash distribution.
The BofA DIP, meanwhile, would be subordinate to B. Riley's loan and would mature on May 15; if the company did not win final DIP approval, the financing would mature on Feb. 13.
BofA would be entitled to a 0.75% closing fee on the new commitment only. Court papers did not specify the loan's interest rate.
Wet Seal, founded in 1962 by Lorne Huycke in Newport Beach, Calif., primarily sells clothing and accessories for female customers from 13 to 24 years old.
In a Friday declaration, Wet Seal CFO Thomas R. Hillebrandt blamed the company's recent financial troubles on a "shift in consumer behavior away from traditional mall shopping toward online-only stores and increase competition throughout the specialty retail fashion industry." Hillebrandt said these factors have created a tough market for many teen retailers.
He's not wrong — Wet Seal follows fellow teen retailers Deb Stores Holding LLC and dELia*s Inc. (DLIAQ) into bankruptcy. Additionally, apparel retailer Body Central Corp. (BODY) recently commenced an assignment for the benefit of creditors in Florida state court.
The CFO also said the debtor's financial performance was further hampered by an aversion to "fast fashion" and ventures into business extensions that were not profitable.
Hillebrandt said that a new management team attempted to implement cost-cutting strategies such as returning to its core business model and shutting down less profitable ventures. These included closing standalone plus-size stores and returning to a model of lower prices with only select promotions, as opposed to high prices with constant markdowns.
Additionally, the debtor is broadening its assortment of styles and buying inventory more frequently to keep its stores fresh.
The debtor in October also eliminated 66 corporate positions and 12 field management positions, saving the company $5.7 million annually.
Nevertheless, with a liquidity crisis still looming, Wet Seal late last year hired FTI Consulting Inc. and Houlihan Lokey Capital Inc. to help the company explore strategic alternatives.
FTI and Houlihan Lokey worked to secure DIP financing and a Chapter 11 investor that would allow for a "substantial downsizing of the chain and accompanying rent reduction."
To maximize its remaining inventory, Wet Seal began "aggressive inventory sales" in its weaker-performing stores over the holidays and at the start of 2015 closed up shop at many of the locations. Wet Seal on Jan. 7 announced that it was closing 338 stores after it failed to obtain concessions from its landlords. Following the closures, the retailer will continue to operate 173 stores and its Internet business, it said.
Wet Seal plans to reorganize the company around its e-commerce business and the remaining stores that have the biggest potential for profitability, Hillebrandt said.
The retailer's financial results for the third quarter ended Nov. 1 show how badly the company was struggling. Wet Seal reported a steep 14.5% drop in comparable store sales for the quarter and an operating loss of more than $36 million, according to the Dec. 10 report.
Revenue for the period slid to about $104 million from nearly $115 million for the same quarter a year earlier. Wet Seal added that cash and cash equivalents had shrunk to $19 million, or about half of the $40 million it had for the second quarter ended Aug. 2 and far from the nearly $52 million in the first quarter ended May 3.
In its petition, Wet Seal reported $92.89 million in assets and $103.42 million in liabilities as of Nov. 1.
The company's largest unsecured creditors include Hudson Bay Master Fund Ltd. (owed $28.87 million), Simon Property Group Inc. ($1.04 million), Hansae Co. Ltd. ($1.03 million), Hana Financial Inc. ($998,006) and Samson Associates LLC ($853,265).
On Jan. 2, the mall-based chain said it had received a notice of default from Hudson Bay, the holder of its senior convertible note. It has a forbearance agreement with the debt holder until Monday.
Wet Seal shares were trading at 4.9 cents on Friday morning, down 37%. Court papers show the debtor's largest shareholders are Paradigm Capital Management Inc. (10.03%), Ameriprise Financial Inc. (7.23%) and Clinton Group Inc. (6.11%).
Local debtor counsel Maris J. Kandestin and Michael R. Nestor at Young Conaway Stargatt & Taylor LLP could not be reached for comment Friday morning. Lee R. Bogdanoff, Michael L. Tuchin, David M. Guess and Jonathan M. Weiss of Klee, Tuchin, Bogdanoff & Stern LLP in Los Angeles also are debtor counsel.
— Richard Collings contributed to this report.
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