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Sep 26, 2019

The Hollander DIP - The Difference Between Shoes and Bedding Products

David Sieradzki

 

KSV is presently the Information Officer of Hollander Sleep Products, LLC (“Hollander”), a cross-border insolvency with the main proceeding under Chapter 11 of the US Code.

The lead-up to the Hollander proceeding was an exercise of differentiating Hollander, a significant manufacturer of bedding products, with the 2017 cross–border proceedings of Payless Holdings Inc. LLC (“Payless”), a shoe retailer.  Both cases were applications under Part IV of the Companies’ Creditors Arrangement Act involving a proposed DIP structure whereby unencumbered Canadian assets were to be granted as security in favour of the DIP lenders. 

In preparing for Hollander’s Part IV application, the Payless DIP loan issues were a major consideration.  Hollander had the following facts:  Large US operations, with less significant Canadian operations.  Canadian borrower not liable for prepetition obligations owing to Hollander US’s ABL lenders.  $90 million DIP loan approved (with a “roll-up” structure) in the Chapter 11 proceeding conditional on being recognized in the Canadian proceeding.  Canadian borrower to be jointly and severally liable under the proposed DIP facility.  Following various legal and financial analyses, the professionals concluded that the details of Hollander Canada’s situation were significantly different from Payless.  Justice Hainey agreed as reflected by his reasons for approving the Hollander DIP, an excerpt of which is as follows:

 

I have concluded that the Court’s decision in Payless is distinguishable from this case for the following reasons as set out in the applicant’s factum:

  1. In Payless, the Canadian Applicants were not insolvent, were not prepetition borrowers, had never granted security and were not borrowers under the DIP Facility.In this case, Hollander Canada is insolvent, its assets are encumbered, and it is incapable of maintaining going concern operations without urgent funding support from the DIP ABL Facility.For instance, $7.2 million of Hollander Canada’s accounts payable are currently past due; without support from the DIP ABL Facility, Hollander does not have sufficient liquidity to satisfy these obligations.
  2. In Payless, there was evidence of material prejudice to Canadian creditors and certain Canadian creditor groups opposed the DIP order because they were disadvantaged.In this case, no such material prejudice or unequal treatment exists with respect to the creditors of Hollander Canada or the other Chapter 11 Debtors.
  3. In Payless, the Court intimated that if marshalling had been permitted, the inequitable treatment of Canadian creditors would have been resolved.In this case, the DIP ABL Lenders have specifically agreed to a quasi marshalling concept to ensure that Canadian assets are used first to satisfy Canadian DIP ABL indebtedness, and not applied to satisfy U.S. DIP ABL indebtedness until all U.S. assets are first exhausted.

I have concluded that the DIP ABL Charge should be granted for these reasons.” 

 

Justice Hainey’s reasons are available here.  KSV’s analysis of the DIP facility was detailed in the Information Officer’s pre-filing report dated May 23, 2019, a copy of which is available here.

Two important take-aways from Hollander are as follows:

  1. It is important to consider both the current financial position and the projected financial results of the Canadian debtor on a standalone basis, notwithstanding that it can be a challenge to extract the relevant Canadian financial information.In Hollander, this exercise was critical as it was not apparent from the DIP budget prepared in the US or the financial information presented in the Chapter 11 materials that Hollander Canada was insolvent and/or that it required significant funding under the DIP to continue to operate in the normal course.These were key points of differentiation between the Hollander and Payless situations.
  2. The Court recognized the efforts made by the Canadian professionals to negotiate certain provisions into the DIP facility to address, up-front, the concerns expressed by the Court in Payless.

 

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