Nine West sponsor Sycamore makes Belk threat as estate cause of action talks get heated

27 September 2018
 
by Reshmi Basu

Nine West sponsor Sycamore has threatened to direct its Belk portfolio company to discontinue selling Nine West products if parties can’t reach a litigation settlement that’s to the private equity fund’s liking, according to three sources familiar with the matter.

The threat from Sycamore to Nine West unsecured creditors was levied as negotiations progress this week and bondholders move closer to taking over the debtor, the sources continued. Nine West’s path to emergence has been congested with plan valuation disputes as well as designs by certain unsecured creditors to pursue litigation against the owners related to the 2014 LBO transaction.

The valuation dispute took a major step forward just yesterday when unsecured TL lenders and holders of unsecured notes due 2019 and 2034 announced a tentative settlement through which they would support a split of the shoe retailer’s reorganized equity. The intercreditor deal calls for the unsecured TL holders to take 92.5% of Nine West’s reorganized equity, and the remaining 7.5% will go to all other unsecured creditors, including the 2019 and 2034 noteholders. Additionally, the unsecured TLs would receive USD 40m in cash, which will come from a fully backstopped commitment from the ad hoc group of unsecured noteholders.

But left unresolved is Sycamore’s stance on a plan for the establishment of a litigation trust that would be established for the benefit of unsecured creditors, excluding the unsecured TLs, which would include rights to any estate causes of action against Sycamore with respect to the 2014 LBO. To that point, Sycamore’s threat of directing its department store company Belk back out of a Nine West supply agreement could damage the latter company’s business prospects post-emergence, to the detriment of the new owners, the sources said.

For its part, the UCC, which has been amped to investigate potential claims, has agreed shorten the length of the probe. Still, economics of a potential litigation and the establishment of the trust has become a point of contention for all sides. The UCC, which wanted to investigate the potential claims, would cease discovery into Sycamore on the earlier of a plan effective date or 31 December 2018. The committee would also agree to a budget for the remainder of the case. The unsecured TLs may work with the ad hoc unsecured group to deal with potential non LBO-related preference claims.

Nine West unsecured creditors have been preparing to argue that subsidiaries were insolvent at the time of the LBO, meaning the guarantee backing the unsecured TL should be terminated. Matt Clemente of Sidley Austin, representing the ad hoc unsecured noteholder group, said yesterday that the group’s USD 40m commitment is a crucial step toward releasing value in the litigation trust process.

Previously, the company’s independent directors made a settlement proposal to Sycamore Partners and KKR of USD 470m to resolve lawsuits stemming from the 2014 LBO.

A hearing on a disclosure statement and any backstop commitment fees is set for 30 October.

Of note, Belk had been on shaky footing itself from an earnings standpoint. But the capital has traded up this month after the company beat earnings expectation and bought back some debt.

Representatives with Nine West and Sycamore declined comment.