The discussion includes the process of bidding for, financing and acquiring distressed companies in the Apparel and Retail space is competitive and complex. The panel addressed the strategies and tips for success from the perspectives of an investment banker, a deal and bankruptcy lawyer, a turnaround executive, a lender and a tax accountant.

1.
1
TRANSCRIPT:
EVENT
SPONSORS:

2.
2
Alternatives
for
a
Distressed
Company
in
Apparel
and
Retail
May
9,
2013
CIT
Trade
Finance,
Los
Angeles,
CA
Moderator
Alexander
B.
Kasdan,
Managing
Director,
DelMorgan
&
Co.;
Founding
Partner,
Convergence
Capital
Partners,
LLC
Panel
David
S.
Kupetz,
Partner,
SulmeyerKupetz
George
P.
Blanco,
Partner,
Avant
Advisory
Group
Steve
J.
Cupingood,
CPA,
Partner,
SingerLewak
Mitchell
Cohen,
EVP,
CIT
Trade
Finance
Event
Organizer
Anna
Spektor,
Founder
and
President,
Expert
Presence
Kasdan:
The
subject
of
our
conversation
today
is
the
life
cycle
of
businesses
in
apparel
and
retail
and
restructuring
alternatives
for
troubled
companies.
Mitch,
as
the
dominant
player
in
the
industry,
can
you
give
us
your
observations
of
the
marketplace.
Cohen:
CIT
lends
to
companies
involved
in
the
chain
of
retail
distribution
and
helps
companies
evaluate
and
minimize
their
business
risks.
We
help
companies
with
factoring,
which
includes
the
collection
of
money.
In
general
today,
the
market
is
growing
slowly,
and
that’s
where
CIT
looks
for
opportunities
to
help
clients
operate
more
efficiently.
When
you
talk
about
a
healthy
business
today,
it
usually
includes
the
following
fundamentals:
a
diversified
customer
base
and
an
excellent
management
team.
The
economy
growth
at
2%
today
is
nominal,
and
the
only
way
to
grow
a
business
is
to
make
it
run
more
efficiently
and
beat
the
competition
by
gaining
market
share.
One
of
the
hot
topics
today
is
the
imposition
of
higher
tariffs
on
denim
in
Europe
up
to
three
times
historical
levels.
Denim
manufacturers
have
to
get
creative
to
get
around
this:
manufacturing
in
Mexico
is
one
option.
At
the
end
of
the
day,
this
is
just
another
hurdle
that’s
going
to
impact
the
industry
and
shift
more
manufacturing
off
shore.
Kasdan:
The
industry
has
become
very
fragmented.
From
the
investment
banking
perspective,
the
overall
2013
transaction
volume
and
deal
multiples
are
up
compared
to
2011
and
2012,
yet
companies
have
to
come
up
with
creative
ways
to

3.
3
diversify
and
maintain
margins.
There
is
a
greater
valuation
disconnect
between
branded
and
non-­‐branded
apparel,
and
many
retailers
are
struggling
in
this
economy.
David,
from
your
perspective
as
a
restructuring
lawyer,
what
are
some
of
the
most
common
mistakes
that
retailers
make?
Kupetz:
Maybe
the
easiest
way
to
address
that
question
is
to
give
a
quick
case
study
that
George
Blanco
and
I
worked
on.
No
Fear
Retail
Stores
was
a
company
that
licensed
apparel
products
but
got
into
retail.
The
company
made
a
lot
of
typical
errors.
Management
was
very
resistant
to
any
outside
help
and
refused
to
hire
restructuring
advisors.
The
focus
was
on
what
in
hindsight
certainly
appear
to
be
unrealistic
financing
opportunities
-­‐
the
company
attempted
to
go
public
through
a
reverse
triangular
merger
with
a
small
company
listed
on
the
Toronto
exchange;
the
CFO
was
more
of
a
controller;
management
paid
little
attention
to
customer
base
and
marketing
strategy.
The
situation
ended
up
as
a
Chapter
11
expedited
Section
363
sale.
By
the
time
No
Fear
hired
a
CRO
(Chief
Restructuring
Officer),
it
was
too
late
to
turn
the
business
around.
It
is
very
common
that
the
owners’
resistance
to
hire
outside
professional
advisors
leads
to
the
total
deterioration
of
the
business.
No
Fear
failed
to
address
cash
hemorrhaging,
while
management
needed
to
refocus
its
marketing
strategy,
the
focus
was
misdirected
to
doing
a
complicated
financing
transaction.
The
owners
lost
track
of
running
the
business
and
its
core
strengths.
The
focus
was
on
non-­‐core
retail
operations.
Overexpansion
was
another
factor,
with
over
50
stores
opened
in
a
relatively
short
time,
and
with
a
number
of
them
not
profitable.
Not
focusing
on
core
strengths
is
often
a
big
error.
Another
factor
was
back
office
problems,
which,
CIT,
for
example
could
have
helped
solve.
No
Fear
filed
Chapter
11
too
late.
While
it
was
able
to
secure
DIP
financing,
the
company’s
internal
projections
proved
to
be
off
the
mark,
and
the
financing
did
not
provide
the
runway
the
management
projected.
All
internal
projections
and
financials
were
prepared
without
the
input
of
a
CRO.
We,
as
debtor’s
counsel
advised
and
creditors
committee
insisted
the
company
hire
restructuring
professionals.
Management
thought
the
company
had
plenty
of
runway,
which
was
not
the
case.
Once
hired,
George
quickly
discovered
the
company
required
an
expedited
sale
process.
No
Fear
was
a
closely
held
company
started
by
twin
brothers
–
high
energy,
motocross,
Nascar
racers,
who
had
a
lot
of
great
ideas
over
the
years.
Historically,
the
business
was
relatively
well
managed
and
probably
could
have
reorganized
had
the
professionals
been
brought
in
in
time.
Ultimately,
we
ran
a
successful
sale
process,
with
a
Section
363
auction
lasting
until
four
in
the
morning,
which
ended
as
two
separate,
contemporaneous
sales
for
IP
rights
to
the
company’s
existing
international
venture
partner
who
was
competing
in
the
bidding
with
private
equity
firms
and
the
retail
assets
to
an
operator
who
would
operate
the
business
as
a
going
concern
under
a
different
name
and
who
outbid
the
liquidators.

4.
4
Ultimately,
the
equity
holders
and
principals
could
have
gotten
better
returns
had
outside
help
been
brought
in
in
time.
Sooner
rather
than
later
is
always
better
to
maximize
value.
Kasdan:
This
is
a
very
similar
fact
pattern
to
another
transaction
David
and
I
worked
on
together,
eStyle,
Inc.
or
BabyStyle,
where
the
company
was
in
Chapter
11,
was
literally
a
“melting
ice
cube”
heading
for
liquidation,
and
we
had
to
run
an
accelerated
sale
process
in
under
three
months
and
ultimately
sold
the
business
to
a
strategic
buyer,
RightStart,
owned
by
a
private
equity
firm,
Hancock
Park
Associates.
George,
from
an
enterprise
value
enhancement
perspective,
when
is
a
good
time
to
bring
in
a
restructuring
professional
to
return
the
company
to
profitability?
Blanco:
Obviously,
sooner
rather
than
later.
Often,
it’s
a
60-­‐90
days
runway;
a
year
is
best.
Even
sophisticated
buyers
of
services
don’t
think
about
advance
notice.
In
the
case
of
No
Fear,
the
entrepreneur
brothers
built
the
company
up
by
“guerilla”
marketing
and
did
not
believe
they
could
fail
until
it
was
too
late.
The
challenge
in
being
a
CRO
is
getting
the
entrepreneurs
and
management
focused.
We
also
frequently
rebuild
value
through
an
investment
banker
who
can
bring
in
outside
capital.
Cohen:
One
thing
that
always
happens
from
the
lender’s
perspective
is
the
management’s
lack
of
focus
on
their
inventory,
which
cannot
be
sold
through
normal
channels.
This
has
a
direct
impact
on
gross
profit
margins.
Kasdan:
David,
how
do
you
get
distressed
deals
done
in
what
has
become
a
very
competitive
market,
with
a
lot
of
money
chasing
relatively
few
opportunities?
Kupetz:
An
acquirer
can
buy
assets
or
secured
debt
to
gain
control.
There
are
many
different
transaction
structures
for
in
or
out-­‐of-­‐court
restructuring.
One
is
a
Section
363
sale
in
chapter
11.
There
is
a
conventional
Chapter
11
restructuring.
For
example
represented
American
Home,
a
furniture
retailer,
which
expanded
beyond
its
core
business,
with
many
expensive
locations.
Through
a
prepackaged
Chapter
11
plan,
American
Home
liquidated
out
non-­‐profitable
stores
to
pay
off
a
secured
lender,
reorganized
around
core
New
Mexico
locations
and
restructured
its
unsecured
debt.
Today,
however,
you
do
not
see
too
many
conventional
restructurings.
Another
option
is
an
assignment
for
the
benefit
of
creditors
or
an
ABC,
which
in
California
is
a
non-­‐judicial
alternative
to
bankruptcy,
with
assets
transferred
to
an
assignee
that
acts
as
a
trustee,
with
the
responsibility
to
maximize
the
value
of
the
assets
under
the
circumstances
and
distribute
the
net
proceeds
to
creditors.
ABCs
can
be
very
effective
but
do
not
work
in
all
situations.
Generally,
an
ABC
does
not
work
for
multi-­‐location
retailers
that
have
many
landlord
disputes
because
the

5.
5
debtor
does
not
have
the
benefit
of
the
Bankruptcy
Code
Section
365,
which
allows
the
debtor
to
assign
or
reject
real
estate
leases.
ABCs
can
work
well
in
the
apparel
and
fashion
industry,
in
appropriate
circumstances,
where
a
seamless
transaction
can
be
structured
with
lender
consent,
avoiding
the
uncertainty
and
minimizing
the
expenses
of
a
Chapter
11
filing.
Acquisition
of
assets
of
Fortune
Fashion
Industries
by
Jerry
Leigh
of
California
is
a
good
example
of
a
successful
ABC
transaction.
Kasdan:
In
running
a
sale
process
in
distressed
cases,
the
timeline
is
very
accelerated,
where
the
buyers
may
not
be
able
to
do
sufficient
due
diligence
and
have
to
make
quick
decisions
based
on
available
information,
within
the
constraints
of
the
legal
system.
David,
can
you
comment
on
the
recent
legal
decisions
affecting
the
distressed
marketplace.
Kupetz:
Last
year,
in
the
RadLAX
Gateway
Hotel,
LLC
v.
Amalgamated
Bank,
132
S.
Ct.
2065
(2012),
the
Supreme
Court
ruled
that
a
secured
creditor
cannot
be
stripped
of
its
right
to
bid
under
a
Chapter
11
plan
providing
for
a
sale.
The
decision
made
clear
that
the
same
protections
that
exist
for
lenders
in
a
Section
363
sale
with
regard
to
the
right
to
credit
bid
also
exist
in
the
context
of
a
Chapter
11
plan
providing
for
a
sale.
There
is
continuing
uncertainly
in
the
context
of
a
bankruptcy
by
a
licensor,
whether
the
trademark
licensee
has
the
right
to
retain
the
license.
The
1984
Lubrizol
(4th
Cir.
1985)
case
held
that
a
licensor
was
allowed
to
reject
IP
licenses
in
bankruptcy
and
strip
out
the
rights
of
licensees,
which
was
a
pretty
harsh
outcome.
Congress
amended
the
Bankruptcy
Code
in
1988
to
add
Section
365(n)
to
preclude
this
outcome
with
respect
to
“intellectual
property”
licenses,
but
did
not
include
trademarks
within
the
definition
of
intellectual
property.
Moreover,
the
Sunbeam
(7th
Cir.
2012)
case
increased
uncertainty
regarding
the
state
of
the
law
in
this
area
by
holding
that,
separate
and
apart
from
Section
365(n),
trademark
licensees
are
entitled
to
protection
under
non-­‐bankruptcy
law
that
prevents
bankrupt
licensors
from
stripping
out
their
rights
and
that
Lubrizol
was
decided
incorrectly.
Another
thing
that
is
significant
in
the
context
of
retail
Chapter
11
cases
is
that
there
is
a
cap
of
210
days
on
time
now
to
decide
whether
to
assume,
assign,
or
reject
leases.
This
has
changed
the
dynamic
of
retail
restructuring
cases,
as
the
debtor
lessee
no
longer
has
the
benefit
of
potentially
unlimited
time
to
make
decisions
with
regard
to
leases.
Kasdan:
Next
question
is
for
Mitch
and
George.
How
is
the
intellectual
property
(IP)
treated
in
restructuring?
Do
lenders
perceive
IP
as
a
separate
asset
class,
especially
in
the
apparel
context?
Blanco:
The
question
is
always
how
to
monetize
IP.
The
value
is
in
the
eye
of
the
beholder,
but
there
is
a
substantial
number
of
buyers
of
IP
and
a
market,
in
the
US,
Europe
and
Asia.
The
issue
is
having
something
that
someone
else
wants
to
buy
and

6.
6
monetize,
such
as
a
national
well-­‐recognized
brand.
Look
at
the
case
of
Quicksilver.
Lenders
will
not
lend
against
IP,
although
they
say
they
will.
Cohen:
The
challenge
with
IP
is
that
from
a
valuation
point
of
view,
it
is
certainly
in
a
separate
class.
The
trick
is
to
understand
the
value
the
day
you
make
the
loan.
The
value
of
IP
is
really
cash
flow
driven.
We
have
had
some
very
successful
brand
liquidations.
The
common
denominator
was
the
owners’
management
styles,
as
they
tried
to
protect
the
brand.
The
actual
business
may
not
be
profitable;
however,
the
brand
still
has
a
lot
of
value
in
the
marketplace.
You
have
to
protect
the
name
and
have
control
of
the
brand.
You
can
still
receive
market
value
for
the
brand,
even
if
the
actual
business
is
doing
poorly.
The
company
may
not
be
making
any
money
because
its
marketing
expenses
are
way
out
of
line,
but
the
brand
still
has
tremendous
value
and
recognition.
Blanco:
Two
quick
examples
of
this:
No
Fear
developed
the
whole
portfolio
of
brands
and
marks.
In
another
non-­‐apparel
case
we
worked
on,
over
$300mm
was
spent
on
developing
the
IP
and
the
last
$20mm
hedge
fund
investor,
contrary
to
its
expectations,
got
out
$95mm
at
liquidation.
Frequently,
in
these
situations,
you
see
a
damaged
company
and
don’t
recognize
that
the
value
lies
in
non-­‐tangible
assets.
Kasdan:
How
do
you
find
value
in
distressed
situations?
The
investor
perception
is
that
there
are
great
opportunities
to
generate
returns.
How
do
you
find
the
gems?
Blanco:
For
me,
there
are
two
kinds.
One,
you
help
somebody
acquire
a
pretty
damaged,
downsized
company
in
Article
9,
basically
for
the
value
of
the
equipment,
employees
and
customer
lists.
The
question
is
can
you
rebuild
value.
The
other
scenario
is
whether
there
is
enough
critical
mass
to
strip
out,
so
that
you
can
take
three-­‐to-­‐six
months
to
rebuild
backlog
profitability.
The
more
critical
mass
or
assets
there
are,
the
easier
it
may
be
to
rebuilt
value.
Otherwise,
you
may
be
buying
“a
melting
ice
cube,”
with
no
possibility
to
extract
value.
Kasdan:
Steve,
what
are
the
tax
ramifications
of
doing
distressed
deals?
Cupingood:
Generally
to
the
extent
the
debt
is
satisfied
for
less
than
its
face
value,
there
is
going
to
be
income.
The
question
is
whether
the
income
is
taxable.
Generally,
there
are
a
couple
of
exceptions
dealing
with
insolvency
and
bankruptcy.
In
these
instances,
if
the
company
is
in
bankruptcy,
the
income
is
not
taxable.
If
the
discharge
of
indebtedness
occurs
when
the
taxpayer
is
insolvent,
no
income
is
recognized
for
federal
income
tax
purposes.
The
IRC
defines
insolvency
to
mean
the
excess
of
liabilities
over
the
fair
market
value
of
assets
immediately
before
the
debt
discharge.
Kasdan:
How
does
a
buyer
preserve
the
NOLs
in
a
bankruptcy
sale?
Cupingood:
Section
363
allows
for
the
court-­‐approved
sale
of
either
the
assets
or
the
stock
of
a
debtor
corporation.
The
deal
structure
of
the
sale
affects
the

7.
7
immediate
income
tax
consequences
of
the
transaction
to
both
the
buyer
and
the
seller.
The
buyer
may
prefer
to
keep
the
seller
intact
and
to
acquire
stock
to
preserve
the
NOLs.
If
the
buyer
cannot
use
the
debtor
income
tax
attributes,
then
the
buyer
is
likely
to
purchase
the
assets
to
get
a
stepped-­‐up
depreciable
tax
basis.
Kasdan:
At
what
point
does
a
troubled
company
bring
in
a
tax
accountant?
Cupingood:
In
the
beginning,
if
possible,
to
figure
out
a
tax
advantageous
structure
of
the
transaction:
stock
v.
asset
sale.
Blanco:
The
trouble
is
it
may
be
expensive
to
bring
in
all
the
professionals.
A
quick
tax
assessment
would
be
very
helpful.
Accountants
are
better
at
looking
at
the
numbers.
Cupingood:
Most
of
the
time
we
can
do
a
quick
and
dirty
analysis
of
what
makes
sense,
whether
it’s
the
NOLs,
alternative
minimum
operating
tax
or
other
tax
consequences.
Many
restructuring
attorneys
call
us
for
a
quick
assessment
of
the
situation.
You
want
to
know
what
the
effect
of
selling
a
company
is
going
to
be.
Kasdan:
Is
there
a
way
to
structure
a
Section
363
sale
as
a
tax-­‐free
reorganization?
Cupingood:
You
can
structure
a
Section
363
sale
as
a
tax-­‐free
reorganization
under
the
IRC
Section
368,
an
exchange
of
stock
in
a
tax-­‐free
statutory
merger.
Kasdan:
What
are
the
tax
considerations
from
the
buyer’s
perspective?
Cupingood:
Buyers
typically
want
to
buy
assets.
Some
assets
such
as
IP
may
have
zero
tax
basis
even
though
they
have
value.
Buyer
wants
stepped
up
basis
to
amortize
the
assets
over
time
going
forward.
Buyer
may
be
willing
to
pay
for
some
of
the
tax
effects.
Kasdan:
In
closing,
I
would
like
to
reiterate
that
restructuring
is
a
very
complex
and
tough
to
navigate
area.
To
execute
a
successful
transaction,
it
is
imperative
to
have
a
team
of
competent
and
experience
professionals
in
place.
It
is
imperative
to
bring
in
trusted
advisors
at
the
earliest
sign
of
distress.
In
today’s
environment,
lenders
are
reluctant
to
work
out
underperforming
credits.
By
the
time
issues
are
addresses,
the
companies
may
be
beyond
a
turnaround.
At
an
earlier
stage,
there
may
be
multiple
options
that
a
competent
investment
banker
can
address,
such
as
raising
capital
or
shedding
non-­‐core
assets.
While
the
market
could
and
expected
to
become
more
robust,
deals
are
getting
done
and
with
the
right
structure
in
place
and
addressing
all
the
right
constituencies
and
players,
these
deals
can
be
very
interesting
and
generate
significant
returns.