Value City gets final OK for $40 million DIP loan; objections to liquidation agreements overruled

By Rebecca Melvin

New York, Nov. 19 - Value City Holdings Inc. obtained final court approval Wednesday for up to $40 million in debtor-in-possession financing from National City and Wells Fargo Retail Finance LLC, and several liquidation agreements - to which objections were raised - were approved by the U.S. Bankruptcy Court for the Southern District of New York.

The liquidation agreements with Tiger Capital Group LLC were in place prior to the Oct. 26 bankruptcy filing, and they were a condition of the DIP lending agreement. They were controversial because the aspect of arms-length negotiations was called into question.

"I'm not blessing the original agreements," judge James Peck said, but the contracts should be allowed to be assumed because they are "market tested" and given current conditions in the retail market, including the recent filing of Circuit City, and the state of retail in general, "having Tiger in place is preferable to the estate and its creditors than not having them in place."

"The alternative is either to have Tiger continue to perform under a pre-petition agreement without the benefit of a court order, or to have them walk away by virtue of the lenders' exercising of remedies by having them declare an event of default," Peck continued.

Modifications made subsequent to the filed objections included Tiger waiving a pre-petition claim of $1.6 million and reducing its base fee for existing stores to $22,500 from $25,000 for Value City's 66 remaining stores.

Objections came from the U.S. Trustee and Thor Macomb Mall LLC, one of the creditors on the unsecured creditors committee, which as a group backed assumption of the Tiger contracts.

The U.S. Trustee said heightened scrutiny was required because of potential insider transactions, and Thor Macomb Mall said that the contracts amounted to a legacy agreement that represent a "very good deal" for Tiger.

Augmented goods at issue

Another controversial aspect of the agreements was the fact that Tiger would augment Value City's inventory with its own products, in an arrangement that would give Tiger 95% of the proceeds and Value City 5%.

"Who on the committee is providing augmented goods? Who has provided augmented goods to Tiger?" the U.S. Trustee's representative asked the court.

The hearing determined that only one creditor, NEJ Inc., a jeans supplier, had supplied $135,000 in augmented goods in this case.

The split, Peck said, at least compensates Value City for using their stores. And augmentation of goods, while controversial, can materially impact the success of the overall liquidation, he said.

Peck called the case "challenging," with significant questions raised as to the relationships at the principal level, namely those in control of Tiger management and those in charge of the board of Value City.

But the arrangements between Value City and Tiger were inherited and in process long before the company went into bankruptcy, he said. And despite approaching other liquidators, no other liquidator was interested in Value City's case.

In regard to the final DIP order, Peck asked that provisions added at the committee's request to facilitate the committee's acceptance be removed.

"I do not like DIP orders that become loaded up with Christmas ornaments unrelated to the terms and conditions of the lending. If the committee, lender and Value City has granted standing, that should be the subject of a separate order. Take it out of the DIP order, I don't like it there," he said.

Interest on the DIP loans will be Base rate plus 100 basis points.

Proceeds will be used to repay pre-bankruptcy debt and for general corporate purposes. The facility will mature in 120 days.

When asked how the case is going, Value City counsel John Longmire of Willkie Farr & Gallagher LLP said, "sales are 6-7% off plan," perhaps owing to the fact that the Tiger contracts hadn't yet been assumed so that it hadn't been able to augment inventory or advertise. Or, Peck said, it may be that consumers have closed up their pocketbooks.

As previously reported, ongoing operations are not an option for Value City, but only store closings and going-out-of-business sales. The Chapter 11 filing resulted from the constriction or elimination of existing trade credit and restrictions on availability under its pre-bankruptcy credit agreement, according to court documents.

Value City had been unable to replenish inventory in its stores but had continued to pay operating expenses.

The company listed $100 million to $500 million in both assets and debt.

Value City's largest unsecured creditors include DSW Inc., Columbus, Ohio, with a $4.49 million expense claim and NEJ Wholesale Clothing, Beacon Falls, Conn., with a $1.39 million merchandise claim.

Value City, a Columbus, Ohio, off-price retailer, filed for bankruptcy on Oct. 26. Its Chapter 11 case number is 08-14197.

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