UPDATE: October 18, 2018: Nine West Holdings filed a revised plan of reorganization for its remaining brands — One Jeanswear Group, The Jewelry Group, Kasper Group and Anne Klein — in bankruptcy court on Wednesday. The company said in a press release that the plan has the support of parties holding 85% of its secured debt and 80% of its unsecured debt. It would knock $1 billion in debt off the company’s balance sheet while paying secured lenders in full and turning over the new company’s equity to unsecured lenders and other creditors. A hearing is set for Nov. 7 to consider approval of the plan.
- A group of unsecured creditors to Nine West have asked a federal bankruptcy court for permission to sue the fashion retailer's private equity owner, Sycamore Partners, over an alleged fraudulent transfer and other claims totaling "well over $1 billion," according to a court filing. Sycamore did not immediately respond to Retail Dive's request for comment.
- The creditors say that Sycamore designed its leveraged buyout of the Jones Group, which ultimately created the Nine West holding company, "to unfairly deflect the risk" from Sycamore to Nine West's lenders. Those lenders, they said, "shared none of Sycamore's potential upside." (The namesake brand property of Nine West as well as Bandolino were sold this summer to Authentic Brands Group, leaving the company's remaining brands to reorganize in bankruptcy.)
- The group further alleged that Sycamore, by carving out valuable pieces of the Jones Group, made $300 million net from the leveraged buyout while the Nine West holding company ultimately went bankrupt. The creditors said they had nearly reached a deal over the remainder of Nine West's assets that would have prevented the motion to prosecute their claims against Sycamore.
That Nine West creditors are looking to sue the holding company's private equity owners comes as no surprise. Even before Nine West filed for bankruptcy in April, Reuters reported that lenders planned to do so. Moreover, such suits are typically the main leverage unsecured lenders have when fighting for repayment in a bankruptcy case.
But the unsecured lenders' complaint also highlights the fraught relationship retail has had with private equity over the past decade and a half or so. In a January paper published with the American Bankruptcy Institute, Chuck Carroll and John Yozzo of FTI Consulting found that two-thirds of retail bankruptcy filings in 2016 and 2017 were by private equity-controlled companies.
Nine West lenders allege Sycamore, which has made dozens of acquisitions in retail, engineered an acquisition of the Jones Group that essentially set up the remaining Nine West entity for failure. At the same time, the lenders say, Sycamore essentially sold to itself valuable assets from Jones "at prices hundreds of millions of dollars below their true value" while leaving $800 million in new debt on the books of the Nine West holding company created out of the deal.
"To justify selling the Carve-Out Assets to its affiliates for below market prices, Sycamore engaged in outright fraud," the group said in a filing. Specifically, the lenders allege that starting in 2013, when it bid for Jones Inc., Sycamore, "prepared increasingly aggressive 'pro forma' estimates and projections to inflate the supposed value" of the Nine West company created in the buyout, while "simultaneously driving down the implied value of and forecasts" of the assets sold off in the buyout.
The private equity firm did this, the lenders say, by relying on "highly speculative and subjective 'sponsor addbacks' and other adjustments" and at the same time "were moving in the exact opposite direction of contemporaneous trends" in retail.
Suits over fraudulent transfers and other complaints typically are settled rather than litigated, analysts and lawyers say. As for the Nine West brand itself — which liquidated its retail operations in Chapter 11 — today it lives on with Authentic Brands (itself controlled by a group of private equity firms), which has recently struck a deal to stock Nine West products at Kohl's.