UPDATE: February 5, 2020: Forever 21 won approval from a federal bankruptcy judge for its plan to auction itself later this month. The court also approved the $81 million “dark horse” bid from Authentic Brands Group, Simon Property and Brookfield, which serves to set a baseline for a bankruptcy auction and would preserve Forever 21 as an operating retailer.
The auction, if necessary, is set for the morning of Feb. 10, with a hearing the next day to consider the sale.
- Parts of Forever 21's plan to sell itself quickly in bankruptcy have come under fire from suppliers and landlords concerned about repayment after the retailer fell behind in recent months.
- A group of Chinese suppliers, who say they are owed more than $18 million on Forever 21 orders since it filed for Chapter 11, objected to the retailer's sale plan, saying there were no provisions for payments owed to them. They warned nonpayment would financially hurt them and "wreak havoc" on Forever 21's supply chain, ultimately lowering the retailer's sale value.
- A committee of Forever 21's major unsecured creditors were among those to file objections to the rapid timeline of the auction plan. The committee alleged that Forever 21 owed suppliers and other creditors tens of millions of dollars and said in court papers that "even a going-concern sale is likely to devastate non-secured creditors."
Some of Forever 21's largest suppliers and landlords are airing their dismay over the quick turn the retailer's finances and bankruptcy plans have taken. They're also voicing concerns that even with an $81 million baseline bid for the retailer on the table, they may be left holding the bag when the process is over. Forever 21's unsecured creditors said specifically that they were "profoundly disappointed with the rapid changes in circumstances of these cases."
"Only a few short months ago, [Forever 21] held these cases out as an operational reorganization of the Debtors' domestic and international businesses with a clear path to emerging as a reorganized entity," the committee said in court papers. That led vendors, landlords and others to provide financial support in the form of trade credit and rent concessions to help Forever 21 make it through and out of bankruptcy.
"Then, starting in December 2019, circumstances abruptly changed," the committee said. According to the creditors, Forever 21 stopped paying cash to merchandise suppliers, landlords and other trade creditors as lenders forced the company to use its cash to pay down the retailer's bankruptcy loan.
As Forever 21's struggles continued into bankruptcy, the retailer struck a deal with Authentic Brands and two of its largest landlords, Simon Property and Brookfield, to be the stalking horse bidders in a proposed auction. That bid could salvage the company as a "going concern," rather than forcing it into liquidation, and reduce the risk to the landlords of losing a major tenant. (Simon and Brookfield together represent 187, or 42%, of Forever 21's locations in the U.S., according to the unsecured creditor committee.)
The committee's objection wasn't lodged against the retailer's basic effort to sell itself, but rather is concerned with the quick timeline and the nearly $5 million breakup fee included in the stalking horse bid. The creditors described the fee as "inequitable" and without a sound business rationale, and said that "every dollar saved matters to those burned by these cases."
As for the timeline, the group suggested its brevity could hurt the ultimate value that Forever 21 would sell for. Another group of foreign suppliers said in an objection that "extending the deadlines by only a week may significantly change the likelihood that other potential bidders may submit a Qualified Bid," which could boost the sale value of Forever 21.
That would in turn increase the pot of money that would go around. As recent bankruptcy cases, including Toys R Us and Sears, have shown, suppliers can be paid nickles on the dollar for goods they shipped to a bankrupt retailer.
The group of Chinese suppliers pointed back to Forever 21's own filings early in the case that made much of the retailer's strong relationships with its vendors and their importance to the business. "Unfortunately, the trust and the strength of the relationships between Forever 21 and its Chinese export vendors and suppliers that forms the backbone of the company has been broken by [Forever 21]," the vendor group said.
Forever 21 has proposed a final bid deadline of Feb. 7 and an auction, if necessary, on Feb. 10. A hearing is scheduled for Feb. 4 to approve the sale process.