Dive Brief:
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Denim retailer True Religion on Wednesday announced it has filed for bankruptcy protection and expects to obtain the bankruptcy court’s confirmation of a pre-arranged plan with its lenders within 90 to 120 days, according to a company press release.
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That plan, which has the support of a majority of the apparel maker's lenders and its private equity owner TowerBrook Capital Partners, will reduce debt by over $350 million and convert it into the substantial majority of the reorganized company’s equity.
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True Religion will continue to operate its business without interruption to customers, employees and business partners, and its plan provides for full payment of claims of its continuing trade creditors, which includes continuing vendors, suppliers and landlords. The retailer will also take steps to bolster its digital business.
Dive Insight:
Fickle fashion tastes, a mainstay issue for retailers, and the peculiar consumer attitudes of the moment, including a preference to save spending for smartphones and experiences, have presented a challenge to apparel retailers in recent years. Many like True Religion are struggling, declaring bankruptcy and even folding — including once healthy companies like Sports Authority and The Limited.
Like many private equity-owned retailers, True Religion is hobbled by debt, leaving it less able to take on such challenges. In January, Moody’s Investors Service downgraded its $386 million outstanding amount ($400 million original face value) first lien term loan due 2019, and its $85 million second lien term loan due 2020. In February, Moody's analysts noted in an email to Retail Dive that those actions reflect the company’s “heightened probability of default and lower and ongoing earnings declines driven by challenges in the retail environment, denim category and the company’s brand position.”
Under the plan being reviewed by a bankruptcy court in Delaware, True Religion has secured post-petition debtor-in-possession financing from Citizens Bank N.A. for up to $60 million. Once True Religion’s plan is confirmed and it achieves the desired deleveraging of its balance sheet, the company will have sufficient “exit” funding, also provided by Citizens Bank N.A., in addition to its ongoing cash flow, to finance operations, the company said in a press release.
In his statement on Wednesday, CEO John Ermatinger stressed that the company has good prospects, considering its adjusted EBITDA through May was $7.1 million, up 95% versus last year. “By dramatically improving our capital structure 24 months in advance of our term loan maturity, we will continue business operations as usual and provide our employees and business partners the long-term stability they need, while providing the necessary flexibility to invest in growing our digital footprint, building connections with customers, and improving organizational competencies,” he said.
The company’s legal advisors include Wachtell Lipton Rosen & Katz and Pachulski Stang Ziehl & Jones. The company’s financial advisor is MAEVA Group, LLC.
