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Item 1.01
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Entry into a Material Definitive Agreement.
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The information set forth below in Item 1.03 of this Current Report on Form 8-K (this “Form 8-K”) regarding the DIP Credit Agreement (as defined below) and the Restructuring Support Agreement (as defined below) is incorporated herein by reference.
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Item 1.03
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Bankruptcy or Receivership.
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On April 7, 2016 (the “Petition Date”), Pacific Sunwear of California, Inc. (the “Company”) and each of its subsidiaries (collectively, the “Debtors”) filed voluntary petitions in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) seeking relief under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). The Chapter 11 cases are being administered under the caption “In re Pacific Sunwear of California, Inc., et al.”, Case Nos. 16-10881, 16-10882 and 16-10883 (the “Chapter 11 Cases”). The Debtors continue to operate their businesses and manage their properties as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
Restructuring Support Agreement and Plan
On April 6, 2016, the Debtors entered into a Restructuring Support Agreement (the “Restructuring Support Agreement”) with PS Holdings of Delaware, LLC - Series A and PS Holdings of Delaware, LLC - Series B, in their capacities as lenders (the “Term Loan Lenders”) under the Golden Gate Credit Agreement (as defined below), and PS Holdings Agency Corp. in its capacity as administrative agent and collateral agent under the Golden Gate Credit Agreement (as defined below) (collectively, the “Consenting Term Loan Parties”). Pursuant to the Restructuring Support Agreement, the Consenting Term Loan Parties will support the Debtors’ plan of reorganization (the “Plan”), which was filed by the Debtors on the Petition Date. Subject to the terms and conditions of the Restructuring Support Agreement and the Plan, the Term Loan Lenders will convert a portion of their debt under the Golden Gate Credit Agreement (as defined below) into 100% of the equity of the reorganized company, with the remaining debt being restructured. The Consenting Term Loan Parties will also provide at least $20 million in additional capital to the reorganized company upon its emergence from Chapter 11, provided the Consenting Term Loan Parties are the “winning bidder” pursuant to the Restructuring Support Agreement and the Plan.
The Restructuring Support Agreement provides that the Debtors and the Consenting Term Loan Parties will take certain specified actions and make certain specified filings with the Bankruptcy Court with respect to the confirmation and consummation of the Plan. The Plan is subject to certain conditions precedent, including the entry by the Bankruptcy Court of a confirmation order not subject to any stay on enforcement and consistent in all material respects with the Restructuring Support Agreement. The Plan further provides that on the effective date of the Plan, all previously outstanding equity securities of the Company shall be cancelled and discharged.
The Consenting Term Loan Parties have the right to terminate the Restructuring Support Agreement following the occurrence of certain termination events set forth in the Restructuring Support Agreement, including (i) the Debtors failure to perform their obligations under the Restructuring Support Agreement or an event or occurrence required by the Restructuring Support Agreement does not occur, in each case by the applicable deadlines in the Restructuring Support Agreement, (ii) material modifications are made to the Plan that are inconsistent with the Restructuring Support Agreement, (iii) the occurrence of an event of default under the DIP Credit Agreement that remains uncured, (iv) the entry of an order by the Bankruptcy Court to appoint a trustee or examiner with expanded powers for the Debtors, to convert any of the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code, or to dismiss any of the Chapter 11 Cases, (v) the Debtors challenge, or any party in the Chapter 11 Cases is granted standing to challenge, the amount and/or validity of the Claims of any Consenting Term Loan Party or the validity, enforceability, and/or perfection of the Liens held by any Consenting Term Loan Party, (vi) the License Agreements (as defined in the Plan) are terminated by either the Debtors or the counterparties thereto or are determined by a final order of the Bankruptcy Court (or other court of competent jurisdiction) to be incapable of assumption and/or assumption and assignment, (vii) the issuance by any governmental authority, including any regulatory authority or court of competent jurisdiction, of any ruling or order enjoining the consummation of the Plan in a way that cannot be reasonably remedied by the Debtors or would have a material adverse effect on consummation of the Plan, (viii) the Bankruptcy Court enters an order terminating the Debtors’ exclusive right to file a plan of reorganization
pursuant to section 1121 of the Bankruptcy Code, and (ix) exercise by any of the Debtors of its “fiduciary out” as a debtor-in-possession.
Pursuant to the Restructuring Support Agreement and the Plan, the Debtors, in conjunction with their investment banker, will seek a higher and better alternative through a marketing process commencing on or about the Petition Date and governed by bidding procedures, for which the Debtors are seeking Court approval. The Restructuring Support Agreement does not prevent the Debtors from taking or failing to take any action that it is obligated to take (or not take) in the performance of any fiduciary duty or as otherwise required by applicable law which such Debtor owes to any other person or entity under applicable law (as reasonably determined by such Debtor in good faith upon advice of legal counsel).
The foregoing description of the Restructuring Support Agreement and Plan does not purport to be complete and is qualified in its entirety by reference to the Restructuring Support Agreement filed as Exhibit 10.3 hereto and the Plan filed as Exhibit A thereto and incorporated herein by reference.
DIP Credit Agreement
In connection with the Chapter 11 Cases, the Debtors filed motions seeking Bankruptcy Court approval of debtor-in-possession financing on the terms set forth in that certain Debtor-in-Possession Credit Agreement, dated as of April 7, 2016 (the “DIP Credit Agreement”), by and among the Debtors (excluding Miraloma Borrower Corporation, the “Borrowers”), the lenders party thereto from time to time, and Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent and collateral agent. The DIP Credit Agreement provides for a senior secured, super-priority revolving credit facility (the “DIP Financing”) of up to $100 million on the closing date of the DIP Financing (the “DIP Commitment”), which is subject to an asset based borrowing base formula and reserves (including a reserve for the repayment of the pre-petition obligations under the existing Credit Agreement by and among Wells Fargo, in its capacity as administrative agent and collateral agent, the lenders party thereto, and the Borrowers, dated as of December 7, 2011, as amended, the (“Existing Revolving Credit Agreement”). The DIP Financing will become available upon the satisfaction of certain customary conditions precedent thereto, including the entry of an order of the Bankruptcy Court approving the DIP Financing on an interim basis.
The Debtors anticipate using the proceeds of the DIP Financing primarily for (i) purposes permitted by orders of the Bankruptcy Court, including ongoing debtor-in-possession working capital purposes, (ii) the payment of fees, costs and expenses, and (iii) other general corporate purposes, in each case, only to the extent permitted under applicable law, the DIP Credit Agreement, the orders of the Bankruptcy Court, and in accordance with the approved.
The maturity date of the DIP Financing is the earliest of (a) April 7, 2017, (b) if the order of the Bankruptcy Court approving the DIP Financing on a final basis is not entered within thirty (30) days after the Petition Date, immediately thereafter, (c) the effective date of a plan of reorganization, and (d) the closing of a sale of all or substantially all of the assets of the Borrowers pursuant to section 363 of the Bankruptcy Code.
Interest on the outstanding principal amount of revolving loans under the DIP Credit Agreement shall be payable monthly in arrears and on the maturity date at a per annum rate equal to the Base Rate plus 3%. The following additional fees apply: Debtors shall pay to the Lender a closing fee equal to 1% of the Revolving Commitments, and an agent’s fee of $50,000.
Subject to certain exceptions, the DIP Financing will be secured by a first priority perfected security interest in substantially all of the assets of the Borrowers (excluding, among other things, certain real property and related interests and the equity interests in the Company’s subsidiaries). The security interests and liens are subject only to certain carve outs and permitted liens, as set forth in the DIP Credit Agreement. The DIP Financing is subject to certain covenants, including, without limitation, those related to the incurrence of additional debt, liens, the Borrowers’ failure to comply with the approved budget (subject to certain permitted variances), certain bankruptcy-related covenants, and certain financial covenants, in each case as set forth in the DIP Credit Agreement. The DIP Financing is subject to certain prepayment events, including, without limitation, upon the sale of certain assets, and certain events of default, including, without limitation, payment defaults, in each case as set forth in the DIP Credit Agreement.
The foregoing description of the DIP Financing does not purport to be complete and is qualified in its entirety by reference to the DIP Credit Agreement, filed as Exhibit 10.1 hereto and incorporated herein by reference.