The Wet Seal applies for Chapter 11 protection

March 2015 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

The Wet Seal, Inc., a specialty retailer for young women, has announced that it has filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States.

The Wet Seal will continue to operate its business as debtors in possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court. In connection with the Chapter 11 cases, the company has negotiated a debtor in possession financing arrangement and plan sponsorship agreement with B. Riley Financial, Inc., the parent of B. Riley & Co, LLC and Great American Group, LLC and its affiliates and designees.

At the time of the Chapter 11 application, The Wet Seal operated a total of 173 stores in 42 states, had a presence in Puerto Rico, and ran an e-commerce website. The company is a pioneer in fast fashion retailing, sells apparel, footwear and accessories designed for teen girls and young women of all sizes.

The debtor in possession provides for a $20m term loan facility, subject to certain limitations and conditions, including a $5m availability block at closing, to be funded on an interim and final basis. This loan facility will provide availability to fund The Wet Seal’s operations during the Chapter 11 process, including to the company’s vendors and other purveyors of goods and services. The Wet Seal also expects to continue to fund operations from cash on hand and cash generated during the cases. The debtor in possession is subject to Bankruptcy Court approval and the satisfaction of specified closing conditions. The Wet Seal also expects to continue to receive certain financial accommodations from its existing lender, Bank of America, including continued cash management services.

“After careful consideration, the board of directors unanimously concluded that filing for Chapter 11 was the appropriate course of action for the Company,” said Ed Thomas, CEO of The Wet Seal. “Overall, we continue to believe in The Wet Seal and remain committed to executing on the strategic steps that we already started. We are thrilled to be working with B. Riley and other constituencies toward the successful and prompt emergence of the Company from Chapter 11.”

The plan sponsorship agreement provides a comprehensive blueprint for the company’s emergence from Chapter 11 as a going concern pursuant to a plan of reorganisation, under which B. Riley has agreed to provide funding and will receive a majority of the stock in the reorganised company at emergence. The plan sponsorship agreement contains certain milestones and conditions, including Bankruptcy Court approval of the company’s assumption of the agreement. The transactions contemplated in the plan sponsorship agreement, in turn, are subject to conditions and confirmation and effectiveness of the plan of reorganisation.

In connection with the bankruptcy filing, The Wet Seal is seeking customary authority from the Bankruptcy Court that will enable it to continue to operate and serve its customers. The requested approvals include requests for the authority to make wage and salary payments, continue various benefits for employees, and honour certain customer programs, such as gift cards and returns on merchandise purchased prior to the bankruptcy filing.

As of January 2015, The Wet Seal was in possession of approximately $31m cash on the balance sheet, including nearly $11m cash used to collateralise letters of credit. The additional financing from the debtor in possession is expected to provide the company with an immediate source of additional funds. These funding sources are expected to enable customary obligations associated with the daily operation of its business, including the timely payment of employee wages and other obligations, to be satisfied.

The Wet Seal has indicated that it will provide additional details with respect to the Chapter 11 filing as soon as it is able to do so.

“We are pleased to provide financial assistance to The Wet Seal in its efforts to revive this iconic fashion retailer,” said Bryant Riley, chairman of B. Riley Financial, Inc. “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.”

Fraser Tennant