Rue21 files for Chapter 11 protection

July 2017 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

July 2017 Issue

In a bid to reduce debt and focus on its best performing stores, leading teen specialty apparel retailer rue21, Inc. filed a voluntary petition for reorganisation under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Western District of Pennsylvania.

The filing, including first day motions, will help ensure a smooth transition into Chapter 11 without disruption. The motions include granting authority to pay salaries, vendors and suppliers in the ordinary course for all goods and services provided on or after the filing date.

In addition to the filing, rue21 has entered into agreements with certain of its lenders to provide additional capital in support of its restructuring, as well as assist in the reduction of the company’s financial liabilities. Rue21 sees the restructuring as an important step forward in its ongoing business transformation into a more focused and highly performing retailer.

In April 2017, the company began the process of closing approximately 400 underperforming stores in its 1179 store fleet in order to streamline operations, better align the size of its footprint with market realities and focus on its hundreds of higher performing locations. The retailer also stated that it may consider additional store closings as it continues to manage its real estate lease portfolio.

The company also reached agreements, subject to the approval of the Court, to obtain up to $125m in ABL debtor-in-possession financing from its existing ABL lenders and up to $50m in new money term loan debtor-in-possession financing from a subset of its existing term loan lenders. This financing is intended to provide rue21 with the liquidity necessary to support its ongoing business operations during the financial restructuring process.

The new financing will support day-to-day operations during the reorganisation, including: (i) continuing to pay the wages of employees without interruption; (ii) paying vendors in the ordinary course for all authorised goods and services provided on or after the filing date; and (iii) honouring all existing customer programmes, including gift cards.

In conjunction with the restructuring, rue21 has entered into a restructuring support agreement (RSA) with certain of its stakeholders that confirms the support of the debtors’ key constituents for the debtors’ restructuring process and contemplates emergence from Chapter 11 proceedings in the fall of 2017 with a significantly deleveraged balance sheet. These lenders hold 96.8 of the company’s secured term loan, as well as bondholders representing 60.2 percent of the company’s issued and outstanding unsecured notes.

“These actions are being undertaken with the goal of strengthening the company’s balance sheet, achieving a more efficient cost structure and concentrating resources on a tighter retail footprint in order to pave the best path forward for rue21,” said Melanie Cox, chief executive of rue21. “Even in a challenging environment, we are fortunate that rue21 has highly relevant brands, an enthusiastic and loyal customer base and hundreds of highly performing stores. The agreement with our lenders represents their confidence in rue21’s future success even at a time of significant retail industry change.”

Retained as legal adviser for rue21 is Kirkland & Ellis LLP, while Rothschild Inc. is the retailer’s investment banker and financial adviser. Berkeley Research Group, LLC is the restructuring adviser.

Ms Cox concluded: “Looking ahead, I am confident that the outcome of this process will be a stronger and more sustainable rue21 for our customers, vendors and business partners.”

Fraser Tennant