Apollo Affiliate Makes Lead Bid for Bankrupt Stationery Retailer Paper Source

By Jonathan Randles

Private equity-owned stationary and gifts retailer Paper Source Inc. filed for bankruptcy, planning to permanently close some stores and sell itself to an affiliate of asset manager Apollo Global Management Inc. in exchange for debt relief, subject to better offers.

Chicago-based Paper Source filed for chapter 11 protection Tuesday in the U.S. Bankruptcy Court in Richmond, Va., becoming the latest retail chain pushed into bankruptcy as a result of the Covid-19 pandemic.

Paper Source said its business was strong and growing until it was forced to temporarily close all of its nearly 160 stores last March in response to Covid-19. Revenue then dropped from canceled weddings and lost sales during the Mother's Day and Easter holidays. The company closed stores weeks after Paper Source acquired additional locations from a competitor, Papyrus Inc., which itself was in chapter 11 at the time.

"Unfortunately, the company never realized the benefits of the Papyrus acquisition," Paper Source Chief Financial Officer Ronald Kruczynski said in a declaration filed in bankruptcy court.

Paper Source, majority-owned by funds affiliated or managed by Investcorp International Inc., comes to bankruptcy with an offer in hand to sell its assets out of chapter 11 to an affiliate of MidCap Financial Trust, the administrative and collateral agent on the company's existing senior loan.

MidCap, a specialty finance firm managed by an Apollo subsidiary, has also agreed to extend Paper Source a $16 million bankruptcy loan to fund the chapter 11 case and proposed sale process, according to court documents.

MidCap's offer will serve as a stalking-horse bid, setting the floor on the price of Paper Source's assets. The lead bid is subject to better bids, should the company receive any in the coming weeks. MidCap's offer is in the form of a credit bid which will allow the lender to use its debt claims as currency to acquire Paper Source, court papers said.

The stalking horse is important to the company's employees and vendors because it means the retail business will exit from chapter 11 in a relatively short amount of time and help generate interest in the proposed sale process, Mr. Kruczynski said.

Paper Source has been marketing the business to potential buyers since early November with the assistance of investment banker SSG Capital Advisors LLC and intends to wrap up a chapter 11 sale process in roughly 50 days, court papers said. MidCap's chapter 11 loan and stalking-horse bid must both be approved by a bankruptcy judge.

While Paper Source's financial advisers run the sale process, the company said it intends to use its time in bankruptcy to close some of its stores for good and negotiate with landlords. Paper Source is immediately closing 11 locations and will be negotiating the terms of its remaining leases with landlords in an attempt to get rent concessions, Mr. Kruczynski said. The company said it pays about $3 million a month in rent and owes landlords roughly $15.8 million in deferred rent.

Forced store closures and other government-mandated Covid-19 restrictions had a significant impact on the company's sales. Paper Source had $104 million in gross sales in 2020, down from $153.2 million in 2019, and filed chapter 11 with more than $103 million in long-term debt, according to court papers.

Paper Source has filed customary motions to continue paying employee wages and cover other ordinary business expenses as it begins chapter 11. The retailer said it currently has about 1,700 employees. The company is scheduled to make its first appearance in bankruptcy court on Wednesday.

Paper Source was founded in 1983 by Susan Lindstrom, who opened the first store in Chicago and expanded the business to more than two dozen locations. In 2007, Ms. Lindstrom sold a majority stake in the retailer to Los Angeles-based private-equity firm Brentwood Associates which later sold the business to Investcorp, court papers said.

U.S. Bankruptcy Judge Keith Phillips has been assigned to the chapter 11 case, number 21-30660.

Paper Source is represented in bankruptcy by the law firms Willkie Farr & Gallagher LLP and Whiteford Taylor & Preston LLP. In addition to investment banker SSG Capital Advisors, the retailer has retained real estate adviser A&G Real Estate Partners.

Write to Jonathan Randles at Jonathan.Randles@wsj.com

(END) Dow Jones Newswires

March 02, 2021 16:36 ET (21:36 GMT)

Apollo Global Management (NYSE:APO)
Historical Stock Chart
From Mar 2024 to Apr 2024