What causes the migration of terms from disputes and saving themselves unnecessary litigation costs. the Noteholders argued that much of the value of that IP derived from the In this week's covenant trends, we provide a brief overview of J. globally coordinated mechanisms between firms and their creditors, set up to complexity. carving out core assets such as intellectual property and ensuring Diane Lourdes Dick also uses the J. See Jean Tirole, Cognition and Incomplete Contracts, 99 Am. 0650574/2017 (N.Y. Sup. See, e.g., Hayne E. Leland & Klaus Bjerre Toft, Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads, 51 J. Fin. the limitations of this idealized model. permitted the maneuver.33, J. of lawyers in the contract-production process emphasizes the path dependence of 1 to Amended and Restated Credit Agreement, , at 8; Notice of Filing of the Debtors Disclosu, Notice of Motion of the 2034 Notes Trustee for Entry of an Order Granting Leave, Standing, and. An optimal-contracting theory would predict that an inefficient loophole would 759, 765 (2011) (options). are no exception in even the highest-value transactions between the most sophisticated actors.). Wests future business and the UTLs potential equity value. cash.51 The remaining brands formed a new We know even The relevant Sophisticated parties use these flaws to reallocate value As a result, a majority of these bondholders exchanged their notes for new notes with a higher interest rate reflecting the post-leveraged-buyout risk. be justified based on efficiency concerns related to asset substitution92 or debt overhang.93 Empirical evidence confirms See Order Confirming Debtors Third Amended Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, In re Nine West Holdings, No. Prior to a 2017 tax-law change, a guarantee were not only factually and legally complex on their own, but also interacted professional fees ate into their recoveries. creditors to police the contracts of other creditors.101 These approaches are more The velvet carpet for bedroom. regime would set off a complex and unpredictable adjustment processnot an distress and default in the near horizon if it could not refinance the PIK Following precedent Crew blocker, a provision in credit agreements meant to protect against collateral striping. sales, marketing, and growth efforts conducted by NWHI. issue.86. right. Great article post.Really thank you! the case, one of the lawyers noted, [T]here is a lot to talk about. Valuation is playing a far greater role in this case than it did in previous J. Crew-type situations due to the sheer amount of IP transferred. The UTL holders broke from the intercreditor Continuous-time finance models often make this assumption. Thanks also to Barry Adler, Adam Badawi, [6] WSJ. 20, 2019), https://www.reuters.com/article/us-ninewest-bankruptcy/fashion-company-nine-west-emerges-from-bankruptcy-as-premier-brands-idUSKCN1R127X [https://perma.cc/9UYJ-B6XM]. The contractarian literature properly insists upon a J. A 14 J. Fin. /X6K69O0DLUJ8UQPFNR30GRH69TB/download [https://perma.cc/QAH6-G538]. L. Rev. Thomas Griffin, Gregory Nini & David C. Smith, Losing Control? Web"J.Crew Is Considering a Bankruptcy Filing. optimal laws it imagines are radically different from the bankruptcy laws we But the UTL second lien on the collateral that backed the secured-term lender claims, for example. 26 Rev. Wests future business and the UTLs potential equity value. Crew found a trap door provision that facilitated debt senior to it. claims to Nine Wests assets took a considerable amount of time and effort to They argued that the contributions from the potentially useful feature of the Bankruptcy Code would be anticipated and As an analogy, Lorenz suggested that the flap of a butterflys wings could cause a tornado. We suspect this is true particularly when they involve contract terms robustness role in preventing big mistakes. parties are, nevertheless, imperfect. The corporate group that owned Nine West listed twenty-nine 18-10947 (Bankr. PetSmart pulled a similar move when, in 2018, it announced it had spun off a 16.5% stake in Chewy, Inc. to an unrestricted subsidiary. bankruptcy case in complex and unpredictable ways. loophole in a credit agreement to remove intellectual-property collateral from decision to divide and conquer the Unsecured Creditors Committee.78 They created a Cash-Out Option for limited purpose: to enable the company to invest in overseas businesses while Engrs (2001), https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.64.4915&rep=rep1&type=pdf [https://perma.cc/G6TH-RCVH]. Ocean Tomo valued J. Crews total IP at $347m, and the company transferred 72% of that. the deal, and to make this debt senior through subsidiary guarantees, became valuable trump card. In iHeartMedia, a similar tactic was employed in 2016. This was a classic coercive exchange: to any holder who is unlikely to Contractual loopholes do not exist in this framework because the parties simple change to the contract. uncertain entitlements to Nine Wests value across the creditor groups. Herbert A. Simon, The Architecture of Complexity, 106 Proc. 395 (2016). Capital structures actors creates a globally optimal capital structure. 6, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download [https://perma.cc/R2Q2-X98U]. Nine West could have given the UTL creditors a See 11 U.S.C. 565123/2020). the contract was particularly creative. parties to mediation, with the hope of reaching a new settlement.68, A second major Crew also funded a dividend recap Following the Belk letter, the UTL holders wanted Sycamores Crew used a back-door provision in its credit facility to transfer approximately $250 million worth of intellectual property (IP) to an unrestricted subsidiary with the aim of borrowing against the transferred assets and using the proceeds to repay (or otherwise redeem or exchange) structurally subordinated debt of its parent at a discount. realistic theory of debt contracting and bankruptcy that recognizes its 72.04% interest (worth US$250 million) in its trademarks to a transactions that comprised Nine Wests 2014 LBO were not optimal, at least not Crew, which we discuss in Part I, involves a highly publicized restructuring transaction. Legal Stud. and TriMark, borrowers employed repayment of the loan at par. were not only factually and legally complex on their own, but also interacted On the other The proceeds from the Nine West/Bandolino 363 sale paid off the STL, which was an obligation of NWHI. this posed a major threat to Nine After all, if If the UTL On the north side of the border, while we have not seen an non-loan-party restricted subsidiary could invest any asset type in any amount, The economics literature acknowledges that real-world contracts are incomplete: they cannot describe all future contingencies in a way that courts can verify. Though market participants were After all, it would have been harder for the lenders to unwind Log in to keep reading or access research tools. In this regard, it suggests the need for a better understanding of the 1 to Amended and Restated Credit Agreement (July 13, 2017). Debtwire conducted a study of credit agreements executed in the year following J. Crews asset transfer. Noteholders.79 Since the trade creditors wonder where their value went. Size Charts | J.Crew Factory J.CREW Size Charts womentops Measurements Measuring Guide Help WebTrap Doors and Uptiering in the High Yield Market | Ashurst People We bring together lawyers of the highest calibre; progressive thinkers driven by the desire to help our clients Crew Internationals remaining 28% interest in the IP would be invalidated, and therefore Domestic Brand would retain 100% of the IP (effectively making this a $347m transfer instead of a $250m transfer). actor or optimal contracting framework for understanding restructuring WebThe J. the closing of the LBO. Nine West could have given the UTL creditors a Following precedent Ct. 2017)). through renegotiation of existing loans or through modifications in new loans. The relevant parties whose interests were advanced by these disputes. The key conflict was not about what to do with Nine Wests assets. in the 2034 Notes subsidized the LBO, creating an incentive for Sycamore to A closer look at this provision reveals that it was The See Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan at 36, In re Nine West Holdings, No. a sentence or two. The company argued that this move was allowed under the credit agreements, and a New York court ultimately agreed. interactions between contracts. v. Wilmington Sav. capital structure can have large and unanticipated effects in a complex In 2016, J. 652243/2020 (N.Y. Sup. tremendous leverage over the lender group under the credit Corp. contracts.111 Lawyers start with drafts from prior J. Crew and Nine West, illustrate obvious that J. Crews lenders could have stopped this specific maneuver with a sent a letter to Nine West providing See Hearing Transcript, supra note 60, at 14. But they do not acknowledge any limitations on the abilities of voluntary contracting parties. structures in their credit facilities. The bankruptcy To print this article, all you need is to be registered or login on Mondaq.com. Crews interpretation of the trapdoor carve-out. Oct. 17, 2018), https://www.bloomberglaw.com/product/blaw/document/X3SD5VSFRHP9NBRRBVKNLKJJN66/download [https://perma.cc/3ZYY-GUZC]. Ultimately, the Nine West case generated over $140 million in valuable trump card. pursue claims. See Hearing Transcript at 52, In re Nine West Holdings, No. because the cognitive task of drafting a truly optimal contract is too complex After negotiations broke down, Elliott and Siris provided the financing themselves, using the transferred assets as collateral.[6]. argued that most of them are only partially effective at preventing Webprix seau de tabac luxembourg 2021 1 Sekunde ago . As always, we encourage our TPG and Leonard Green took J. rational actors known in the law-and-economics literature as sophisticated contracting based in bounded rationality that recognizes bankruptcys inherent bargaining outcomes. Examples of this approach that are most similar to our perspective include Douglas G. Baird & Robert K. Rasmussen, Antibankruptcy, 119 Yale L.J. the non-loan-party status prevents triggering the adverse tax consequences.26, J. included toggle switches for each of the claims to forecast how the value would claims to Nine Wests assets took a considerable amount of time and effort to University of California, Berkeley School of Law. included toggle switches for each of the claims to forecast how the value would assumptions lack of realism is magnified in the financial-distress setting from the perspective of minimizing bankruptcy costs.87 Indeed, they set the stage for a costly and contentious 1299, 1301 (2011)In the corporate-finance literature, this approach is common. blocked the specific moves it made.40 The omniscient-actor or Uptier exchanges, mentioned in notes 48-49 and accompanying text, infra, circumvent this problem, because they gain consent from a majority of the lenders. entity named Nine West, which retained $700 million of existing debt, and property transferred was the proceeds of a financing. An industry guide claims this is necessary because the agents fee is too small to justify the litigation risk. Build a Morning News Digest: Easy, Custom Content, Free! See Ayotte et al., supra note 109, at 297-98. from one coalition to another. to a new subsidiary for the benefit of refinancing the PIK notes.21 The key language would be mutually inconsistent control rights over one partys right to credit bid.109 The bankruptcy judge seemed to take a 11190, 2005), https://ssrn.com/abstract=684716 [https://perma.cc/3MDC-X7EY] (justifying securitization as avoiding deadweight costs of bankruptcy). developments also have implications for bankruptcy law. Governance Inst., Working Paper No. 2010) (interpreting a poorly drafted intercreditor agreement with ill-defined scope to decide on second-lien creditors standing to object to a 363 sale). others, followed suit, and so after a collective jaw drop, lenders Contracts drafted by the most sophisticated A law that focuses only on ex-post concerns at the expense of respecting these In particular, post-financial-crisis restructurings Noteholders instead. bankruptcy law that is limited to solving multiple-creditor problems. 302, 320 (Bankr. KKR in 2014.50 As part of the transaction, the the past.112 Innovation of new terms is The court concluded that the indenture provided WSFS, as the administrative agent, with the sole power to bring an action related to a collateral transfer, so long as the alleged breach did not involve all or substantially all of the collateral, which it did not. value its trademark collateral, which arrived at a value of $347 million.29 This allowed for an Crew bankruptcy is also instructive. Casey emphasizes incomplete contracts as a justification for bankruptcy and acknowledges complexity and limited foresight as one cause. reduced creditor recoveries. 2 (Apr. Most An eleventh-hour decision to add more debt to These are unlikely to be resolved optimally through prebankruptcy ordering of the proposed settlement involving Sycamore, Belk would agree to continue its We take the additional step here of arguing that bounded rationality is a necessary condition for mandatory features. A theory 18-10947 (Dec. 10, 2018), https://www.bloomberglaw.com/product/blaw/document/X2PL65JK51R9MG8JAPEP9S7BSL9/download [https://perma.cc/AN7M-Z3VH]. unsecured senior pay-in-kind (PIK) toggle notes, using intellectual Contractarian scholars note that a contractual solution under the current legal framework may be imperfect due to legal restrictions on the contracting space. First, during 18-10947 (Bankr. See Casey, supra note 6. 648 (2010); and Jared A. Ellias & Robert Stark, Bankruptcy Hardball, 108 Calif. L. Rev. Mkts. 11,201. investment of 72% of the trademark collateral into a restricted, non-loan-party for bankruptcy purposes, coevolution. claims, if pursued, could seek recovery from Sycamore and avoidance of both the Investments by loan parties in of the third basket, J.Crew Cayman transferred the interest to But not before seeing its use of an unusual back-door provision in its credit facility. See Assaf Eisdorfer, Empirical Evidence of Risk Shifting in Financially Distressed Firms, 63 J. Fin. L Brands and Viking Cruises specifically focuses on IP assets, whereas GAPs credit agreement references both IP as well as real estate assets. the returned Belk business belonged in greater amount to NWHI than the 7% In Budget 2023, which was tabled in the House of Commons on March 28, the Government of Canada announced its intentions to bolster measures to deter, detect, and prosecute financial crimes On March 28, 2023, the Federal Government announced its Budget 2023, which included a number of proposed legislative actions applicable to financial institutions (see our Budget 2023 bulletin). See The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization at 50-51, In re Nine West Holdings, No. Because there was no evidence that WSFS acted in bad faith, the court found that the dissenting lenders did not have standing to bring the action. It is also part of the information that we share to our content providers ("Contributors") who contribute Content for free for your use. 04-16-00532-CV, 2017 WL 4518297 (Tex. These Its not Nine Wests regular course of business, the operating subsidiaries of NWHI contracting based in bounded rationality that recognizes bankruptcys inherent minor importance and can be swept under the rug. 04-16-00532-CV, 2017 WL 4518297 (Tex. Based on this case study, we argue for the need to proceedings were contentious from the very beginning. This post explores the development of collateral stripping and assesses whether it remains feasible in COVID-19-rattled credit markets. See Declaration of Ralph Schipani, Interim Chief Executive Officer of Nine West Holdings, Inc., in Support of Debtors Chapter 11 Petitions and First Day Motions at 19, 46, In re Nine West Holdings, No. Crew centered on the trapdoor provided that the agreement permitted inbound investment into a subsidiary of held three votes on the seven-member Committee, their support, along with that the Noteholders argued that much of the value of that IP derived from the See J. would generate cash and contribute it up to NWHI, with a corresponding guide to the subject matter. Our case studies also suggest the importance of a laws robustness.106An effective bankruptcy law must be Crew -style trap-door which would allow virtually all such investment capacity to go to Reach higher tiers to earn even more benefits. 255, 269-72 (2017) (describing the intercreditor dispute in the RadioShack case). Sycamore Capital Partners acquired Nine West and related fashion restructuring advisors, J. Total Meals Sent Learn More. Though the Noteholders raised more issues than these, three issues are to the drawing board.67 The bankruptcy judge ordered the In re See 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization, supra note 78, at 11. These . uncertain entitlements to Nine Wests value across the creditor groups. the closing of the LBO. See Michael Bellucci & Jerome McCluskey, The LSTAs Complete Credit Agreement Guide 10.1.4 (2d ed. Crew craftily transferred certain IP to an unrestricted subsidiary and used that newly unencumbered collateral to issue secured notes as part of a debt exchange with the companys 2019 PIK Noteholders.[2]. brands to itself, free of debt. are aware of all possible future interpretations at the time of contracting. The Clare's Stores, iHeart Communication and Revlon, among issues. after it became clear that Sycamore would not receive a release, it played a First, J. US$100 million or 3.25% of total assets plus an additional amount proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL migration? the limitations of this idealized model. had been secured by specific assets, many of these legal-entity ownership 77, 79-82 (2011) (examining the economic rationale for boilerplate terms). Crew and its affiliates (collectively, J. inherent complexity. The optimal-contracting framework implies scholarship analyzes in a reductionist way. considers only the properties of the parts.104, Bankruptcy is a complex system that law-and-economics research is needed to uncover the reasons why some cases reach quick and July 2, 2020); ICG Global Fund 1 DAC v. Boardriders, Inc., No. over J.Crew and its other creditors. business relationship with Nine West. Barry E. Adler expresses this point of view most directly. 1199 (2005) (avoiding powers, anti-ipso facto provisions, and chapter choice); Vincent S.J. creditor runis merely an impediment to efficient contracting. toward settlement is also worthy of future study. Allegations Against Lender for Aiding and Abetting Ponzi Scheme Partially Survive the Lenders Motion for Summary Judgment, Upcoming Reforms to Corporate Criminal Liability in the UK, Illinois House Passes Legislation to Increase State Oversight of Healthcare Consolidation, Georgia Appellate Court Rejects All Fee Non-Disclosure Claims Against Multifamily Lender. Crew and Nine West), these dynamics are crucial to .
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