Introduction

 

On February 2, 2017, (the "Petition Date"), The Wet Seal, LLC, The Wet Seal Gift Card, LLC, and Mador Financing, LLC (the "Debtors") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.

 

The Debtors are represented by Young Conaway Stargatt & Taylor, LLP. The case has been assigned to the Honorable Judge Christopher S. Sontchi.  A hearing on the Debtors' first day motions is scheduled for February 3, 2017.  A meeting to form the Official Committee of Unsecured Creditors has not yet been scheduled.

 

Background

 

Headquartered in Irvine, California, the Debtors are a specialty retailer selling fashion apparel and accessory items designed for female customers aged 18 to 24 years old. The Debtors are currently comprised of two primary units: the retail store business and an e-commerce business. Through their retail store business, the Debtors operate approximately 142 retail locations in 37 states, principally in leased mall locations.

 

The Debtors indicate that after a previous bankruptcy filing in 2015, they have corrected many operational inefficiencies and implemented brand enhancement efforts. Unfortunately, the Debtors incurred operational losses stemming from onerous lease obligations, underperforming retail locations, and increased competition in the teen fashion retail industry on a broad scale. In addition, the continued growth of online competitors and decline in mall shoppers has consistently challenged the Debtors' ability to sustain a profitable basis. These collective challenges were augmented by unexpected operational hurdles that arose from relocation of the corporate headquarters and the transition to a third party distribution center.  

The Debtors intend to operate their business and manage their properties as debtors in possession while they wind down their operations and implement an orderly liquidation strategy that was commenced prior to the Petition Date, primarily through going-out-of-business sales at the Debtors' retail locations and corresponding discounts offered on the Debtors'

Financial Condition

 

Crystal Financial, LLC is owed approximately $9.7 million under a first lien credit agreement with a maturity date of April 15. 2019. Mador Funding, LLC is owed approximately $15.6 million under a second lien credit agreement.

 

As of the Petition Date, the Debtors have approximately $8 million of unsecured debt, including amounts owed to the Debtors' landlords for past-due rent. 

 

Cash Collateral Motion

 

The Debtors are seeking the use of cash collateral in order to operate their retail locations, conduct the store closing sales, and fund their payroll. Access to cash collateral is a critical component of the Debtors' wind down strategy. Cash collateral will give the Debtors sufficient liquidity to administer these cases.

 

Store Closing Sales Motion

 

The Debtors seek authority to assume a consulting agreement with Hilco Merchant Resources, LLC and Gordon Brothers Retail Partners, LLC, and to conduct store closing sales in accordance with the agreement and the sale guidelines. The store closing sales commenced on January 23, 2017.

 

Shipping Motion

 

The Debtors seek to pay certain prepetition claims for shipping claimants. The Debtors rely on a network of shippers who process and ship the Debtors' merchandise to and from the Debtors' distribution centers and stores. The Debtors estimate that there is approximately $650,000 in prepetition shipping claims as of the Petition Date.

  

Wages and Benefits Motion

 

The Debtors seek authority to pay certain employee obligations and maintain and continue employee benefits programs and schedule a final hearing on the motion.  As of the Petition Date, the Debtors employ approximately 1,723 hourly employees and 33 salaried employees. The Debtors owe approximately $3.2 million of unpaid accrued wages, salaries, gratuities, overtime pay and other compensation. The Debtors assert that no employee is being paid more than the $12,850 statutory cap on prepetition wages.

  

Insurance Motion

 

The Debtors seek authority to maintain existing insurance policies and pay all obligations and to renew, revise, extend, supplement, change, or enter into new insurance policies as needed in the amount of $1,266,095.

 

The Debtors pay approximately: $37,612 for the annual premium for the primary D&O Insurance Program, $354,121 for the workers' compensation program, $168,527 for general liability insurance, $29,652 for umbrella insurance, $215,162 for property insurance, and $23,814 for crime insurance.

 

Taxes Motion

 

The Debtors are seeking authority to pay certain prepetition taxes and fees, including sales and use taxes, which, in the ordinary course of business, accrued or arose before the Petition Date. As of the Petition Date, the Debtors owe approximately $525,000 in prepetition taxes and fees.

 

If we can be of service, please contact me.

 

Rafael X. Zahralddin-Aravena

Commercial Bankruptcy and Commercial Restructuring Chair

Elliott Greenleaf

The I.M. Pei Building

Wilmington, Delaware 19899

Direct: 302-384-9401

Cell: 302-545-2888