Orchard Supply in bankruptcy, gets $205 million lead bid from Lowe's

By Caroline Salls

Pittsburgh, June 17 - Orchard Supply Hardware Stores Corp. filed Chapter 11 bankruptcy Monday in the U.S. Bankruptcy Court for the District of Delaware after reaching an agreement through which Lowe's Cos., Inc. will acquire the majority of its assets for $205 million in cash, plus the assumption of payables owed to nearly all of Orchard's supplier partners, according to a company news release.

Orchard will operate as a separate, standalone business at the completion of the sale process, retaining its brand, management team and associates.

The company said it will also benefit from the financial stability of its new corporate parent, which, combined with the benefits of its balance sheet restructuring, will allow Orchard to continue its repositioning and growth strategy.

"As we have executed our repositioning strategy, [Orchard] has also made significant operational improvements to ensure that our stores are optimally positioned for long-term success," Orchard president and chief executive officer Mark Baker said in the release.

"The steps we are taking today allow us to definitively address our balance sheet issues in order to fully execute on our brand transformation and growth strategies."

Sale support

According to an 8-K filed Monday with the Securities and Exchange Commission, the company and its Orchard Supply Hardware LLC and OSH Properties LLC subsidiaries entered into a sale support agreement with Lowe's and the administrative agent and lenders under Orchard's term loan agreement.

Under the agreement, the agent and lenders support the approval of Lowe's as the stalking horse bidder.

In exchange for their support, the agent and lenders, the company and subsidiaries agreed to use their best efforts to obtain court approval of committed debtor-in-possession financing.

Debt payment issues

Orchard said it previously dedicated considerable effort to addressing the substantial overleveraging that originated in 2006, when it was still owned by Sears.

Since the spin-out in late-2011, the company has reduced its debt and made significant progress against its strategic initiatives to project a consistent and compelling brand identity, drive sales through merchandising and marketing initiatives, improve operational efficiency and better align resources and talent and has increased year-over-year same-store sales as a result.

Still, Orchard said it expected that it would not be able to make scheduled payments when the first tranche of its debt matures in December 2013 and accordingly reviewed a range of alternatives to establish a sustainable capital structure, which would allow it to more effectively run its business and execute on its repositioning and growth strategy.

"Orchard's neighborhood stores are a natural complement to Lowe's strengths in big-box retail, offering smaller-format hardware and garden stores catering to the needs of local customers," Lowe's chairman, president and CEO Robert A. Niblock said in the release.

"Strategically, the acquisition will provide us with immediate access to Orchard's high density, prime locations in attractive markets in California, where Lowe's is currently underpenetrated, and will enable us to participate in a larger way in California's economic recovery.

"Overall, Orchard's business model offers great potential, but it has been burdened with a high level of debt.

"With the debt addressed through the Chapter 11 process and appropriate support from Lowe's, we believe that Orchard will be positioned for profitable growth as a standalone business within our portfolio."

Bid procedures

Under its stalking horse agreement, Lowe's would acquire no less than 60 of Orchard's stores, based on further due diligence on the store locations.

If Lowe's is not the high bidder for the assets, Orchard would pay it a $6.15 million break-up fee and reimburse up to $850,000 of its expenses.

Competing bids are due by 4 p.m. ET on Aug. 9 and must be at least equal to the stalking horse bid, plus the amount of the break-up fee and expense reimbursement and a $5 million overbid amount.

The auction will be held on Aug. 14. Bids at auction must be made in $2 million increments.

Orchard Supply said it expects to complete the process in about 90 days, pending receipt of regulatory and bankruptcy court approvals.

Store closings

Orchard said it fully expects to operate its overall business and the vast majority of its stores as usual during its financial restructuring.

However, the company did request court approval to close eight underperforming stores. Orchard said the proposed store closing sales will dramatically reduce the administrative costs associated with these underperforming closing stores and will benefit the Orchard debtors' estates by providing liquidity during the Chapter 11 cases.

A joint venture comprised of Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC will serve as the stalking horse bidder in the selection of a liquidation agent for the closing stores.

If the joint venture is not the high bidder, Orchard will pay it a $300,000 break-up fee.

The closing sales will run from the date of the court order approving the closing through Sept. 30.

Orchard will have the right to include up to 22 additional stores to the closing sale until 5 p.m. ET on July 31.

Competing liquidation agent bids are due by 4 p.m. ET on June 25, and the auction is scheduled for June 27.

DIP financing

In conjunction with the bankruptcy filing, the company has secured commitments for $176.33 million in debtor-in-possession financing from existing ABL lender Wells Fargo Bank and its term loan lenders.

The DIP financing is comprised of a $164.33 million ABL facility and a $12 million term loan facility.

The ABL facility consists of a $140 million senior secured superpriority revolving credit facility, a $7.1 million senior secured superpriority first-in last-out term loan facility and a $17.2 million senior secured term loan facility from ABL term DIP lenders.

In addition to Orchard's ongoing cash flow, the company said the financing will ensure it is able to continue meeting its financial obligations throughout the Chapter 11 case.

The ABL facility will mature on the earliest of one year from the effective date, 10 days after entry of a sale order, 14 days after confirmation of a plan of reorganization and the plan effective date. The term loan facility will mature on the earliest of 120 days from the bankruptcy filing date, 10 days after the sale order, 14 days after plan confirmation and the plan effective date.

The ABL revolving loans will bear interest at the Base Rate plus 75 basis points. Each protective advance owed to a revolving lender will bear interest at the Base rate plus 300 bps.

The FILO term loan will bear interest at the Base Rate plus 175 bps, and the supplemental term loan will bear interest at 925 bps plus the greater of the adjusted Libor rate or 0.75%.

Orchard said the term loan lenders also formally agreed to support the acquisition agreement with Lowe's as the stalking horse bidder.

The company is seeking interim access to $124.33 million of the ABL facility and $6 million of the term loan facility.

Debt details

According to court documents, Orchard Supply had $441.03 million in assets and $480.14 million in debt as of May 4.

The company's largest unsecured creditor is Kawahara Nursery Inc. of Morgan Hill, Calif., with a $1.47 million trade claim. Orchard did not list any other unsecured creditors with claims of $1 million or more.

ESL Investments, Inc. and ACOF I, LLC each hold more than 5% of the company's voting securities.

According to the 8-K, the bankruptcy filing constitutes an event of default under Orchard's pre-bankruptcy credit facility and term loan credit agreement.

The company said it believes any attempts to enforce default-related payment obligations are stayed by the bankruptcy filing.

The company is represented by DLA Piper LLP (US).

Orchard Supply is a San Jose, Calif.-based hardware retailer. Its Chapter 11 case number is 13-11565.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.